Argentina - Special report : private sector impact of the 1976-1980 economic program

Report No. 3631-AR FILE COPY Argentina Special Report: Private Sector Impact of the 1976-80 Economic Program February 11, 1982 Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY U Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization CURRENCY EQUIVALENTS Currency Unit Peso ($a) December 31, 1978 US$1 = $a1007 $al = US$.0010 December 31, 1979 US$1 = $a1622 $al = US$.0006 December 31, 1980 US$1 = $a2000 $al = US$.0005 June 30, 1980/-1 (a) US$1 = $a4963 $al = US$.0002 (b) US$1 = $a7565 $a1 = US$.00013 December 30, 1981 US$1 = $a10,600 $al = US$.000094 1/ On June 21, 1981 the Argentine authorities created a dual exchange rate system, with a fixed rate to be adjusted monthly for exports and imports (a), and a freely fluctuacting rate for financial transactions (b). FOR OFFICIAL USE 0NLY This report examines the adjustment process of the agricultural, industrial and financial sectors to the price stabilization and liberalization policies enacted between 1976 and 1980. It particularly focuses attention on the 1979/80 movements in relative prices resulting from a stabilization strategy which relied heavily on opening the economy via a slowing of exchange rate adjustments and the lowering of trade barriers. While the impact of these measures was immediately felt by the exporting sector, import-competing activities were affected only after a considerable lag. Expansionary fiscal policies proved incompatible with exchange rate management and led eventually to a substantial devaluation. The present Government faces the task of revitalizing private sector activity in the context of a renewed stabilization effort and without abandoning the objective of greater economic efficiency through trade liberalization. The report is based on two missions that visited Argentina in September and November 1980. The members of the first mission which concentrated on large-scale industry included Messrs. Joel Bergsman, IFC; Dick Asjes, IFC; and Jan Peter Wogart, LC2; the second mission was composed of Jan Peter Wogart (Mission Leader), LC2; Julio Duran (Financial Economist) LC2; Mariluz Cortes (Industrial Economist) DED; Lucio Recca (Agricultural Economist) Consultant; and Elizabeth Gross (Research Assistant) LC2. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS Page No. I. MAJOR ECONOMIC POLICIES, 1976-1980 ......1................I II. EFFECTS ON AGRICULTURAL OUTPUT, EXPORTS AND PROFITABILITY . 8 III. IMPACT ON PRIVATE MANUFACTURING ................. ......... 21 IV. THE FINANCIAL SECTOR AND THE ADJUSTMENTS PROCESS .......... 34 V. SUMMARY, CONCLUSIONS AND OBSERVATIONS ..................... 45 Appendix 1: Revenues and Cost of Agricultural Enterprises in the Pampas and the Interior Appendex 2: Adjustment Process of Selected Firms in Three Major Industrial Subsectors LIST OF TABLES 1. Nominal and Real Interest Rates, 1976-1980 ................ 3 2. Real Effective Exchange Rate for Imports and Exports, 1969-1981............................................. 4 3. Indices of Output and Land Productivity in Crops, 1960-1980 .....................................9......9 4. Value and Shares of Agricultural Exports 1970-1980 ........ 11 5. Indices of World and Argentine Grain Prices, 1970-1980 .... 15 6. Indices of Beef Prices: Argentina and USA, 1978-1980 ..... 16 7. Relative Input Prices for Argentine Agriculture, 1974-1980 17 8. Output and Investment in Manufacturing 1971-1980 ......... 22 9. Exports of Industrial Products ............................ 23 10. Share of Industrial Imports in Supply of the Industrial Sector, 1970-1979 .......................... ........ 23 11. Output Per Worker in Manufacturing, 1973-1980 ............. 24 12. Financial Ratios of Industrial Enterprises, 1976-1980 ..... 29 13. Profits, Prices, Labor Costs and Employment of Firms Producing Traded and Non-traded Industrial Goods, 1977-1980 ............................................ 32 14. Monetary Indicators, 1974-1980 .......................... 37 15. Nominal and Real Monthly Rates of Interest ................ 40 16. Sources of Investment Financing 1967-1980 ................. 44 MAP IBRD NO. 12432R1  CHAPTER I MAJOR ECONOMIC POLICIES 1976-1980 Background 1. When the Government of General Videla took office in March 1976, it faced not only one of the worst economic, political, and social crises in Argentine history, but also the accumulated results of several decades of what can only be seen, in retrospect, as mostly counter-productive economic policies. This legacy, with whose impact on private sector expectations the new Government had to contend, consisted of: (a) Instability and inconsistency in economic policies, personalities, and results, marked by inflation, despite continual stabilization efforts; a chronic tendency toward overvaluation of the exchange rate, interrupted intermittently by drastic devaluations and wage controls, with large resulting swings in profits between protected industries and export agriculture. (b) Increasing government intervention in the economy, with higher deficits and mounting distortions in markets for goods, services and factors induced by price controls, negative real interest rates, high protection against import competition, and a host of fiscal subsidies. 2. Negative real interest rates and high protection meant that indus- trialists did not have to be efficient to be profitable. On the contrary, the most important aspect of business was to arrange for loans and to invest the proceeds in real assets. Businessmen who had access to formal credit seldom re-invested in the same line of business, because borrowed capital was so cheap. Rather, profits from one activity were used to form the base for another, financed by yet more loans, and so on--keeping leverage high to take advantage of the benefits inflation brought to debtors. 3. Agricultural producers were not in the position to set their own prices, since most of them competed in international markets, but they also benefitted from a liberal credit policy with negative real interest rates. As a consequence, there was substantial investment in machinery and equipment. On the other hand, many farmers used their own funds for working capital purposes, and there was relatively little "investment" in fertilizer and other important inputs, mainly because relative prices were highly unfavor- able for the agricultural producer. As a consequence, both land and capital were underutilized. 4. Given the history of instability of economic policies, few Argentines had reason to believe that any policy would long survive if it harmed an important sector. Economic ministers, faced with the need to correct past excesses, had designed economic recovery programs before, however those programs and ministers rarely survived the complaints of those who had to bear the costs of correction. - 2 - 5. The most recent and worst inflationary period occurred in the mid-1970s. The years 1973-74 saw rapid economic growth accompanied by increas- ing inflationary pressures. Following the death of President Peron in mid-1974, management of the economy became ineffective. The exchange rate was devalued periodically, but, despite deteriorating terms of trade and shrinking domestic income, wages were allowed to rise continuously, and the resultant inflation negated the devaluations. The public sector deficit mushroomed, as tax administration broke down, new personnel were hired at an accelerated pace, and more pesos were printed to pay for it all. By the first quarter of 1976, inflation had reached an annual rate of over 800 percent. External debt service was over one-third of exports, reserves were almost exhausted, and default seemed imminent. Policy Objectives and Strategy: 1976-1980 6. The new Government resolved the immediate economic crisis with a policy package that included the introduction of a crawling-peg exchange rate, rollovers of external debt, the freeing of domestic interest rates and restric- tions on wage increases. For the longer-term, the Government's objectives were: (a) reducing inflation at least to international levels; and (b) creating a basis for long-run income growth by forcing the economy (principally the industrial sector) to become more efficient. Policies to achieve these objectives had to be consistent also with reducing the balance-of-payments disequilibrium and short-term external debt and the avoidance of widespread unemployment. In the latter regard, Argentines placed a high priority on the avoidance of renewed social unrest. 7. While inflation initially was fought with orthodox fiscal and wage policies (1976), the Government briefly used price controls and monetary constraints in 1977/78 and finally chose exchange rate and tariff policies to enforce price discipline in 1979-1980. The growth strategy aimed at strengthen- ing the country's external position through accelerated development of sectors in which Argentina enjoys a comparative advantage. In line with that strategy, agricultural policies, including tax, credit, tariff, marketing and exchange rate measures, experienced significant changes in the direction of bringing farm product and input prices in line with international levels. Increased efficiency for the private sector in general, and for the industrial sector in particular, was pursued by removing two major sources of distortion. First, in 1977, interest rates were allowed to rise to positive real levels. Secondly, import competition was enforced by reducing import duties, removing most import licensing restrictions, and by slowing the rate of devaluation, thus making external prices progressively lower relative to domestic prices. - 3 - 8. Thus both major objectives--short-term price stability and increased long-term efficiency--were pursued mainly through exposing the Argentine economy to market forces. Financial costs rose (more for some firms than for others), while selling prices were limited (more for some firms than for others) by actual or potential import competition or, for exporters, intensified competition abroad because of the appreciating peso. Policy Details 9. Interest rates. Interest rates since 1976 are shown in Table 1. At least two aspects of this history are worth noting: Table 1: NOMINAL AND REAL INTEREST RATES, 1976-1980 (Annual Averages in Percent) Nominal Rates Real Rates Weighted Domestic Foreign Domestic Foreign Average 1976 94.2 118.1 -60.0 -54.8 -58.5 1977 196.6 133.6 20.0 -5.3 11.7 1978 195.4 89.9 21.4 -22.0 7.1 1979 144.8 86.8 6.9 -18.4 1.4 1980 104.9 42.8 29.9 -9.5 16.9 SOURCE: Mission estimates, see Statistical Appendix, Tables 1.2 and 4.4 (a) After negative real interest rates in 1976 (and for most of the previous 20 years), peso real rates became positive in 1977. Except for 1979 the average real rate on domestic loans rose to two digit levels, ranging from 20 to 30%. (b) External loans were far cheaper than peso loans for those firms able to borrow foreign currency and willing to bear the risk of devalua- tion. (It must be remembered that the data in Table I are ex post; to a borrower deciding whether to borrow pesos or foreign currency, the latter bore a risk that the former did not.) 10. Fixed-interest peso loans in recent years have been granted almost exclusively on a 30-day basis. Thus, an industrial firm or a farm unable to borrow abroad found itself faced with an unavoidable rise in interest costs for virtually all its debt to real monthly levels of 5% in late 1977. 1) Of a sample of thirty of the largest industrial firms, financial costs increased from about 10% to over 20% of sales within a few months--and these 1/ It should be noted that this was the prime rate, and many borrowers undoubtedly had to pay more. were the firms with the best access both to external lenders and to the lowest-rate peso loans. While the financial burden was lessened sub- stantially in 1979, when the rate of inflation was above the rate of interest during the first 9 months, the problem of high financial costs became serious again at the end of 1980. 11. Import protection. Total realized protection against imports of manufactures (as measured by ratios of domestic prices to CIF import prices) fell about 40% from the January 1969/March 1977 average to February 1981. 1/ The factors producing this result were: (a) cuts in import duties, many of which were above actual price differences in the 1960s and 1970s, but as of February 1981 were actually below them; (b) a relaxation of licensing require- ments for all but a few products; and (c) a fall in the real peso/dollar exchange rate. The real exchange rate and the effective rates for imports and exports of different kinds of goods are shown in Table 2. 2/ Table 2: REAL EFFECTIVE EXCHANGE RATE FOR IMPORTS AND EXPORTS, 1969-1981 (1969 = 100) a/ Imports Exports (A) (B) (C) (A) (B) (C) December 1969 100.0 90.0 171.1 100.0 90.0 147.0 March 1977 112.6 124.2 180.8 108.6 103.1 147.1 January 1979 91.6 100.8 145.6 91.3 87.6 127.0 January 1980 76.4 84.0 110.9 77.6 74.8 108.4 February 1981 70.3 79.8 107.1 71.5 69.5 103.0 March 1981 86.1 100.3 134.6 89.8 78.8 129.4 (A) Import and export exchange rates without tariffs and taxes. (B) Import and export exchange rates for agriculture. (C) Import and export exchange rates for industry. a/ 100 - for the import and export exchange rates without tariffs, taxes or subsidies. SOURCE: Statistical Appendix, Table 1.1 1/ 1969 and 1977 are the only years for which estimates of nominal and effective protection or a large number of industries exist. For sources, see Statistical Appendix, Table 1.1. 2/ The general import and export exchange rates are based on nominal exchange rates adjusted for domestic and international inflation. The sectoral exchange rates are further adjusted for incentives or disincentives granted or levied on each sector. - 5 - 12. As is often the case in countries with high protection, import duties plus fees were above actual price differences in Argentina until recently. In December 1969, average price differences for manufactured goods were about 71%, while duties and fees averaged over 100%. In December 1976, average duties and fees were cut to about 65%, but a few months later, in March 1977, price differences were only 42%. However, with further duty cuts and the precipitous change in the real exchange rate, a very unusual situation arose. By late 1978 duties had been reduced and the peso appreciated to levels where redundancy was, on average for manufactures, about zero; i.e., domestic prices were about equal to import prices including duties. 1/ It was at that time that the Government decided to use the exchange rate as its main (indeed almost the only) anti-inflation tool. Peso devaluation (in nominal terms) was held at pre-announced rates starting at 80% per year and decreasing, and import competition was relied upon to reduce inflation (then at 160% per year) to international levels. Thus, in January 1979, price differences averaged 48%, while duties and fees were about 45%; and by January 1980 the price differences were estimated at 56%, while duties plus fees were still about 45%. 2/ 13. Export Incentives. The deterioration of incentives for traditional exports resulting from real peso appreciation was similar to the reduction in import protection. Strengthened tax and credit incentives for non-traditional exports counteracted the peso appreciation to some extent, so that the fall in the effective exchange rate for manufactured exports was about 30% between 1977 and early 1981. However, this estimate is ex post and includes credit incentives which are cumbersome to apply for and have not been used by all exporters. Thus, the incentives ex ante, as seen by a potential exporter, would have appeared to be less. Nevertheless, the somewhat smaller decrease in real export incentives made profit margins on export sales on products with high value added almost equal to those on domestic sales. This was particularly true for capital goods, many of which preferred exports to domestic sales in 1980 because of better credit conditions they received from commercial banks. 14. Investment Incentives. The profit squeeze on farmers and industrial- ists was mitigated, to some extent, by policies that helped to lower capital input costs. In 1979 imported machinery and equipment became available free of duties or licensing requirements. At the low peso/dollar exchange rate in effect since early 1979, imported machinery became cheaper than ever before 1/ In other words, there was "tariff redundancy" in Argentina's industry up to 1979/80, when the tables were turned, forcing domestic producers of tradeable goods to adjust their price changes to international competi- tion. As the 1979-80 comparison shows, however, these adjustments did not take place immediately. (For a computation of tariff redundancy, see Economic Memorandum on Argentina, Report No. 2988-AR, July 10, 1980.) 2/ Although the methods of estimating price differentials are imperfect and, in the 1979/80 case, not perfectly comparable, interviews with a number of industrial enterprises confirm the relative importance of the numbers. - 6 - in Argentina. By taking advantage of regional incentives, existing manufac- turers could until late 1977 build and equip new plants, contributing only 25% of total investment. While the tax deferment for these investments are now indexed, business can still finance its capital outlays in the interior with what amounts to interest-free loans. Incentives to build new plants, on the other hand, were dampened by high construction costs, and high financial costs worked against either modernization of old plants or building new ones. 1/ But, on balance, an enterprise with access to financing and the will to invest could have done so relatively cheaply during the 1977-80 period, Liberalization of capital flows and domestic financial markets helped firms switch to external borrowing when domestic interest rates rose. 15. Tax Policies, Business Costs, and Revenues. In July 1980 the Government announced a new set of measures, most of which became effective during the last quarter of the year. They included: (a) substitution of many small taxes and the employers' contribution to social security and housing (20% of wages) by an increase of the value-added tax from 16% to 20%; (b) re- duced rates of public tariffs for industry; and (c) further liberalization of external borrowing. The intention of all these measures was to decrease business costs, inasmuch as incomes for both agriculture and manufacturing had become largely determined by international prices and the rate of devalua- tion. For the manufacturing sector, these tax changes were estimated to raise exporters' net revenues by between 8 and 15%, depending on the labor intensity of production. For export agriculture, the substitution of a generalized value-added tax for a number of producer and export taxes, together with the reduction of social security payments, meant an increase in net income estimaed to be close to 5%. 2/ Interdependence Among Policies and Major Problems Encountered 16. The policies described are importantly interrelated. Reducing nominal peso devaluations in the face of high inflation leads to increased incentives to import and decreased incentives to export. This would cause an increasing current account deficit, unless restrictive fiscal, monetary and wage policies dampened aggregate demand. If demand restraint is difficult for social or political reasons, domestic interest rates must be sufficient co 1/ Construction costs increased at a more rapid rate than all other industrial costs, because demand from the public and private sectors remained high, and external competition had but a minor impact on pricing. 2/ Metodos Economicos Cuantitativos, Pronostica macroeconomica trienal de la economia Argentina, 1981-1983. Buenos Aires, 1980. -7- attract and retain the necessary foreign financial inflows. Should expecta- tions of a pending devaluation become widespread, ever increasing interest rates will be required to prevent net capital outflows. At the same time that these rates may eventually not be able to stop capital flight, they raise business costs, weaken private sector finances, and set the stage for recession. 17. By allowing the real exchange rate to appreciate, and thereby eliminating redundant protection, the authorities expected that prices of comparable international goods would eventually set a ceiling to domestic prices. This objective was enforced by actions to reduce import tariffs further for those industries which showed excessive price increases. Convergence in fact occurred in the last quarter of 1979; peso inflation, as measured by the wholesale price index, was about equal to international inflation plus devaluation. Interest rates, however, shot up in real terms. A pre- announced devaluation of only 60% per year, together with nominal peso interest rates on deposit of about 105% per year, attracted large inflows of capital in 1979, and Argentina's foreign exchange reserves grew to a level equal to about 1.3 years of imports. After a lag of three months, nominal interest rates decreased between January and March 1980, reflecting both the first signs of declining inflationary expectations and growing confidence in the Government's ability to hold to the exchange rate schedule. 18. Several events in 1980, however, seriously jeopardized the strategy. First, the financial crisis, which came into the open with the liquidation of three large domestic banks, led to speculation against the peso and a renewed increase in interest rates. Secondly, the selection of a new President to take power in March 1981 raised expectations that a substantial change in economic policy might be forthcoming. Thirdly, the Government itself was not able to contain its deficit spending. Real wage increases of over 20% for public employees in 1980, together with increased defense expendi- tures caused by the conflict with Chile, raised the Treasury deficit to about 4% of GDP against the projected 1.5%. Since increased public borrowing would have raised interest rates even more, a large part of the debt was financed by the Central Bank. 19. Finally, the balance of payments experienced a much larger deficit than originally expected. Export growth stagnated, while imports accelerated to a monthly rate of over US$1 billion in late 1980. Including large service outlays, the current account deficit reached US$4 billion, and the loss of international reserves amounted to US$2.5 billion. This deterioration led the authorities to modify the schedule of exchange rate devaluations, holding adjustments at 1% per month from October to December 1980, increasing them to 2% per month for January, and, after a one-step 10% devaluation on February 2, raising the monthly rate to 3%. - 8 - CHAPTER II EFFECTS ON AGRICULTURAL OUTPUT, EXPORTS AND PROFITABILITY Overview 2n, Agricultural growth between 1976 and 1980 responded to sectoral policies quite closely. Stimulated by new tax, tariff, marketing, and exchange rate policies in 1976, output expanded rapidly between 1976 and 1978. The change in strategy in 1979/80 is correlated with a marked reduction in output during the same period, although several other factors also affected output negatively within the last three years. Table 3 presents a first overview of the sector's development, indicating a significant difference between the major agricultural activities of the Pampas and production in the outlying regions. In the first case, land area cultivated increased only slightly, and higher output was achieved through higher yields. In the less productive regions, areas planted expanded continuously together with output, while yields remained nearly constant. This pattern of more intensive land use in the most fertile areas and more extensive use of land in the interior was to a large extent a consequence of policies which aimed simulataneously to increase production and efficiency. Production and Exports of Grain and Cattle 21. A closer examination of the grain subsector shows that annual grain output grew from an average of 23 million metric tons (MT) in 1973/75 to 27 million MT in 1978/80. Yields grew from 1.30 to 1.45 MT/ha during the same period. 1/ While better varieties and improved methods of production contrib- uted to some growth in the output of corn, sunflower and grain sorghum, exten- sion of land under soybeans was most important in explaining overall increases of grain production. The area planted with soybeans increased from 0.1 million ha. in 1971/72 to 1.8 million ha. in 1979/80, producing 3.2 million MT of beans, Soybeans are planted immediately after wheat is harvested in the fertile area of the Northern Pampas. As a consequence, some land which was previously used for cattle grazing is now more intensively used. The wheat/ soybeans cropping pattern has partially substituted also for land devoted to corn production, but the decline in the area planted with corn was largely compensated by increases in corn yields. 22. Grain exports increased by 60% during the 1970s, with soybeans and wheat accounting for the largest share of the increase. There was a quantum jump after 1976, with graia exports growing by nearly 50% from an average of 8.8 million tons to 13 mil..:n to=s in 1979/80. While expansion of grain production explains part c the higher exports, an additional 2.2 million tons per year were channeled from previcusly domestic sales to external markets. The respective impacts on this development of favorable international prices and new government policies, such as the virtual elimination of export taxes, unification of the exchange rate and privatization of grain trade, will be discussed below. 1/ Table 2.6 of Statistical Appendix; for yield increases of most important individual crops, see Tables 2.1 to 2.5 of Statistical Appendix. Table 3: Indices of Output and Land Productivity in Crops, 1960-1980 (1960/64 = 100) PAMPAS OTHER" REGIONS PERIOD Land Land Output Area Productivity Output Area Productivity 1960/1964 100 100 100 100 100 100 1965/1969 119 112 106 114 114 100 1970/1794 136 113 120 130 133 98 1975/1979 163 113 144 154 141 109 1979/1980 158 116 136 142 143 99 NOTE: Index 100 stands for 538.1 million pesos of 1960 for the Pampas and 422.5 million pesos of 1960 for other regions. Index 100 for area stands for 15.95 and 2.25 million ha for the - Pampas and Other regions respectively. SOURCE: Secretariate of Agriculture 23. The raising of beef cattle is still the single most important agricultural activity in Argentina; it represents some 80% of the value of total livestock production. During the 1970s, however, livestock produc- tion grew at rates below those attained by crops. After a period of soaring prices during 1971/1973, prices and profitability declined substantially in 1975/1976, but recovered to levels close to historical averages in 1978/79- As a consequence, beef herds increased from 55 million head in 1974 to 61 million head in 1977, and annual slaughter reached 15.2 million head in the 1976/79 period compared with 10.3 million head during the 1971-75 pericd' 24. Argentine beef exports had declined abruptly from an annual average of over 400,000 tons in 1972/1973 to less than 200,000 tons in 1974/1975 as a consequence of the EEC ban on meat imports. Since 1976 exports have ror rapidly, reaching over 500,000 MT in 1978/1979. A substantial reshuf markets took place with one-fourth of total Argentine exports going to Brz and Africa, two non-traditional markets. Beef exports declined in 1980 some 450,000 MT carcass weight. Since international price movements insufficient to compensate for the increasing gap between changes in prices and in the dollar value of the peso, a larger share of total slaughter was channeled to the domestic market. Agriculture Production in the Interior 25. While livestock still accounts for 60% of the gross value of agriou> tural output in the Pampas, crops are much more important in the interior. Crop production outside the Pampas has diversified substantially in the last four decades to include such different products as cotton, tobaccc, suge-L grapes, a variety of fruits, and tea. While weather and price Zhangesc considerable fluctuations in output, the value of production increase- by2 a year, and exports advanced from US$300 million in 1970 Eo US$1,o 1979. 2/ Many exports have held up well during the 1979/80 stabiiz=- period, although the exchange rate policy, combined with less favorable inZz national prices for most products, lowered "regional" income vis-a-vis e metropolis. Two major products, cotton in the Northeast and aiples in Southwest, exemplify the current situation of most regional gricultu products. 26. Cotton is the main source of rural income in ths non-Pampan area Its development as an import substitute took place after e agricultural Oo=- in the Pampas had run its course in the 1930s and 1940s. Coton producLion advanced relatively rapidly in the 1950s and 1960s and accounted for somE 12% of the value of crops outside the Pampas in 1971/74. The area plazted with cotton in Chaco has experienced large annual variations, averaging 330,000 haa_ during the 1960/1980 period with a maximum of 460,000 ha in 1969/1971 an. a minimum of 185,000 in 1967/1968. The area planted in 1980/1981 41as to be 350,000 ha. The large income variations associated with cotton ture stimulated a search for substitutes such as sunflower, sorghum an6, to a lesser degree, corn and wheat. As a consequence, these crops increased h 1/ In 1977 crops accounted for about 70% of gross agricultural outu i the interior. 2/ In real terms non-traditional agricultural exports rose by about 300% between 1970 and 1979. Table 4: Value and Shares of Agricultural Exports, 1970-1980 (in million of current US$) Share in Total Exports (%) Exports 1977 1978 1979 1980 1970 1980 Cereals 1649 1337 1734 1800 30.9 22.5 Oilseeds and Oil 727 1070 1402 1390 8.0 17.4 Other Agricultural Products 663 716 627 900 7.8 11.2 Subtotal 3039 3123 3768 4090 46.7 51.1 Meat 643 798 1230 940 24.9 11.7 Wool & Hides 453 530 700 660 4.9 3.5 Other Meat Products 137 192 157 150 4.2 6.7 Subtotal 1233 1520 2087 1750 39.5 21.9 Fish 81 149 201 150 0.2 1.9 Total Agricultural Exports 4353 4792 6056 5990 86.4 74.9 SOURCE: Central Bank of Argentina and CEPAL. - 12 - combined share of total agricultural crop production from 20% in 1960 to over 50% in the mid-1970s. Diversification, however, was not continued in the 1976-1980 period. Although Argentina has only a modest participation in the world cotton economy, both as importer of small quantities of long-fiber cotton and exporter of middle-quality cotton fiber, income in the cotton sector is closely linked to foreign sector policies and prices. While imports fell from over 9,000 to less than 6,000 tons between 1975 and 1980, quantities exported increased rapidly and have accounted for 35 to 40% of total production in recent years. 27. The production of apples and pears in Argentina is largely concen- trated in the Upper Valley of Rio Negro, in the provinces of Rio Negro and Neuquen. The valley is a stretch of land of 150 kms. length and a variable width from 3 to 12 km. Commercial production of apples and pears started in the early 1930s. Irrigation, good varieties, carefully designed orchards and improved cultural practices have characterized the development of the area from the beginning. Output was 150,000 MT of fresh fruit in the mid-forties, and 650,000 MT for 1974/76. Recent expansion has benefitted from technological improvements and good climatic conditions which pushed marketed output to slightly above 900,000 MT for 1979/1980. 28. Apple production in the Rio Negro area has always been an export- oriented activity. Exports of fresh fruits to Brazil, the EEC and Northern Europe are now complemented by exports of concentrated apple juice mainly to the USA. The distribution of total output shows an increasing participation of the processing industry, to a large extent at the expense of the domestic apple market, which has remained virtually stagnant in absolute terms. In 1979/80, exports of apples and pears were on the order of 15 million boxes/ year, i.e. some 300,000 MT of fresh fruit; their value increased from less than US$100 million in 1976 to over USS175 million in 1979. Revenues, Costs and Profits 29. Production units in Argentine agriculture are large in the major areas of the Pampas, but economic and financial information is not readily available. An analysis of the balance sheets of a relatively small sample of those farms leads to the following tentative conclusions: 1/ (a) Profitability, as measured both in absolute and relative terms (profit-sales ratio and profits as percent of investment in land), was moderate in 1978/79 and became negative for many farms in 1979-1980, if proper account is taken of financial and general administrative cots. (b) The major cause c0 -hs Hecline was found in decreased revenues, which were negatively affected by a number of factors, most notably the stringent exchange rate policy, but to a certain extent also by decreased production caused by bad weather and low interna- tional prices for some important crops. 1/ For a detailed firm-by-firm account, see Appendix 1: "Revenues and Costs of Agricultural Enterprises in the Pampas and the Interior." - 1.3 - (c) Production costs declined little and were more than offset by higher financial costs. In the northern Pampas, costs remained rather constant in real terms, as increases in technical efficiency were offset by higher financial and labor costs and higher costs of maintaining capital equipment, the life of which was prolonged in order to avoid large investment outlays. Important cost differ- ences among farms in other regions can be explained by different management attitudes, with the more alert farmers shifting rapidly to the most profitable crops and ensuring a better use of their resources. 30. While most of the data pertained to larger farms, many of which were able to respond positively to increased pressure on prices, small farmers seem to have been hit harder. Although low international prices for soybeans and the Government's stabilization policies contributed to their difficulties, there was also an underlying structural problem. Labor is relatively expensive, and most farmers on small holdings could not afford to buy machinery their colleagues were using on more extensive landholdings. Aging farmers, whose sons have migrated to urban areas in search of better employment opportuni- ties, have not been able to take advantage of the latest technological innova- tions. Many of their farms have been rented to farm equipment owners, who were then caught by the 1977 financial reform, which introduced the indexing of both old and new debt. 1/ 31. Small size does not appear to have been a problem in the cotton economy of the Northwest. Compensation data over a number of years are not available, but the 1979/80 experience shows that relatively poor crops for the last two years, coupled with the lowest cotton prices in twenty-five years and a financial reform which withdrew subsidized credit, afflicted all cotton producers in some degree. The major losers were the middle-sized farmers, who produce 50% of total cotton output in Chaco. Small farmers did not suffer sudden losses from wage and interest rate increases, since they used almost exclusively family labor and were making little use of bank credit. 32. In the fruit producing and packing industry, it was again the medium-sized packers who suffered most. Several of them had invested heavily in the prosperous 1976/1977 years. The indexation of credit - started in 1976 - and the need to compete for markets for the increasing fruit output led them into progressively higher debt, both in nominal and real terms. Macro-economic policies appear to have set in motion a process of consolida- tions, in which a large number of small farmers discontinued their operations, and many medium-sized packers and exporters were absorbed by larger firms. This concentration process has taken place in Rio Negro, where at least two large groups of producers and packers merged for the specific purpose of buying inputs, exploring new markets for fresh apples and promoting a single brand of apples abroad. Firms in the production and marketing sectors engaged in serious efforts to adjust their businesses to economic policy, but given the relatively large fraction of value added entering the final 1/ Virtually all agricultural machinery and tractors had been previously financed with official credit at negative interest rates. - 14 - cost of the product, apple producers in the Southwest had to go through more drastic changes of reorganizing production and marketing than grain or beef cattle producers in the Pampas. Changes in Absolute and Relative Prices 33. On the international level, prices for Argentina's major export products increased substantially between 1978 and 1980. While beef prices shot up by over 80%, most other Pampas products rose by about 40%. Soybean oil (as well as sunflower and other vegetable oils) suffered from price fluctuations and, on average, showed a slightly lower level in 1980 than 1978. In brief, international prices in general were favorable, with a few products experiencing small declines. 34. In an open economy, domestic prices for exportable goods like grains result from the interaction of world prices and exchange rate levels. The internal terms of trade for agricultural producers, as measured by the ratio between domestic agricultural prices and non-agricultural wholesale prices, indicate that farmers' prices, after having caught up rapidly with the rest of the economy in 1976/77, started again to fall behind by slightly over 10% in 1978/79 and nearly 20% in 1980 (see Table 2.11 of the Statistical Appendix). A comparison of relative prices for Argentina and the USA, the latter taken as an approximation to world market conditions, is presented in Table 5. In the case of a fully functioning, open economy, movements in both series should be in the same direction, and numerical values should not differ significantly. 1/ 35. The data in Table 5 show that Argentine producers were severely taxed during the period of record world grain prices in 1973-74. The liberal- ization of grain trade in 1976-77 allowed grain prices to rise more in relation to world prices. During the last two years increases in domestic wholesale prices have surpassed increases in domestic prices of exportable grains in Argentina by about 30% in relation to the 1970/71 period. A comparison with the corresponding figures for the USA suggests that this result cannot be attributed to unfavorable world grain prices: ratios for 1979 and 1980 in the USA are clearly above the index of the base period. While agriculture's domestic terms of trade in Argentina rapidly improved after 1976, surpassing the U.S. level in 1977, they deteriorated rapidly after 1977 in contrast to the opposite tendency in the U.S. 2/ 1/ The grain production structure in the two countries is sufficiently similar to warrant a comparison. In the U.S. case, domestic prices followed international prices closely and were not distorted by special government interventions. 2/ As a consequence of low international prices, the internal terms of trade worsened particularly for oilseeds. Wheat and sorghum were only 13% below the 1970 level, but soybean and sunflower hardly reached 50% of the 1970 level. In addition, oilseeds' terms of trade fluctuated more. While fluctuations for wheat, grain sorgum and corn, measured by the ratio between the standard deviation and the average for the period, were on the order of 12% to 16%, the corresponding figures for sunflower and soybeans were close to 30%. - 15 - Table 5: Indices of World and Argentine Grain Prices 1970-1980 Indices of Grain Prices Ratio YEAR Argentina USA (1):(2) (1) (2) 1970 100 100 1.00 1971 105 93 1.13 1972 100 125 .80 1973 121 188 .65 1974 115 176 .65 1975 88 133 .67 1976 87 122 .72 1977 120 101 1.19 1978 98 110 .89 1979 78 104 .75 1980 68 119 .57 SOURCES: Based on data from USDA, Dept. of Commerce, INDEC and SEAG. NOTE: The Index of world grain prices is a simple average of indices of annual prices of wheat, soybeans and corn at the farm level deflated by the Wholesale Price Index of the USA. The Index - for Argentine includes the same three crops, price quotations at the marketing season, deflated by the WPI for non agricultu ral goods adjusted by the SEAG. - 16 - 36. Beef prices provide another indication of the effects of economic policy on domestic prices of exportable goods and on the internal terms of trade for agriculture. The case of beef is particularly relevant given the important share of beef in agriculture as well as its participation in foreign trade. Table 6 compares the evolution of FOB prices for Argentine beef exports, deflated by the WPI of the USA, and domestic beef prices in Argentina deflated by the WPI for non-agricultural goods in Argentina. The figures show a widening gap between domestic and world prices between 1978 and 1980. The order of magnitude of the discrepancies between relative domestic and world prices for the last two years are similar for beef and grain. It should be noted, however, that the internal terms of trade for beef were nearly equal in early 1980 and 1978. 1/ Table 6 INDICES OF BEEF PRICES: ARGENTINA AND THE USA, 1975-1980 FOB Export Domestic Beef Prices Prices Deflated Deflated Period by WPI (USA) by WPI (RA) Ratio (1) (2) (2):(1) (Index December 1978 = 100) Average 1975-77 109 99 .91 December 1978 100 100 1.00 First Semester 1979 126 100 .79 Second Semester 1979 150 118 .79 First Semester 1980 136 99 .73 July/October 1980 138 91 .66 Source: Junta Nacional de Carnes and Department of Commerce 37. The relation between the prices of the farmers' most important invest- ments and inputs and their product prices is presented for wheat in Table 7. Only fertilizer has consistently become cheaper in relative terms. While it took over 6 tons of wheat to buy one ton of 18-46-0 fertilizer in 1974/75, the farmer had to produce only half of that in 1980. In the case of machinery and tractors, the opposite occurred despite the tariff reductions. For a harvester the farmer had to produce twice the amount of wheat in 1979/80 than he did in 1/ From the viewpoint of stabilization policies this was clearly a desirable result, since the stringent exchange rate policy had made it possible to prevent international price hikes from being fully transferred to the domestic economy in 1978. That, however, was a once-and-for-all defla- tionary effect which could not be used again without causing severe allocation problems. Table 7: Relative Input Prices for Argentine Agriculture, 1974-1980 (MT of wheat per unit of input) Wage Harvester Tractor Fertil-izer Urea PERIOD (medium) (68 Hp) 18-46-0 (MT) (unskilled worker (Mt) per month) 1974/1975 212 142 6.5 3.9 1.6 1975/1976 239 121 4.0 5.0 1.2 1976/1977 369 157 3.9 5.2 .8 1977/1978 377 165 3.6 5.7 .6 1978/1979 452 176 3.4 5.2 1.0 Jan/March 1979 441 189 3.1 4.8 .9 April/June 1979 374 167 2.8 4.4 .8 July/September 1979 342 168 3.0 4.1 .9 October/December 1979 359 178 2.8 3.7 .9 Jan/March 1980 368 176 3.2 4.0 1.1 April/June 1980 406 162 3.1 3.9 1.1 July/Sept. 1980 405 136 2.8 3.6 1.0 October 1980 417 149 3.4 4.7 1.1 SOURCE: SEAG. NOTE: Prices from 1974 to 1979 correspond to the marketing season. - 18 - 1974/75. For a tractor he had to produce 20% more in the latter two years. 1/ Apparently, the appreciating exchange rate was offset by increased retailing margins on imports, as distributors attempted to compensate for lower sales volume. In 1980, even the relative price of labor increased again to its 1975/76 level after having fallen steadily from 1974/75 to 1977/78. The Adjustment Process and Input Use in Agriculture 38. Agricultural producers have been attempting to improve productivity and yields for over a decade. While the 1976-80 policies accelerated a number of measures, such as the increased use of fertilizer, they delayed some other output-increasing investments, such as outlays for machinery and equipment. Since there was, however, an ample stock of tractors and agricultural machinery available, the lack of investment did not lead to declining yields, revenues and productivity. 39. In the Northern Pampas, the generalized adoption of the soybeans/ wheat rotation system has produced several important modifications in the agricultural make-up of the region. Capital and land are being used more intensively, with the same machinery and land now being used to grow two crops per year instead of one. Agrochemicals are being heavily used to grow soybeans, creating an external economy for other crops. Increased fertil- ization is also reported with urea, liquid ammonia and, to a lesser degree, ammonium diphosphate, although fertilizer prices are still high relative to international standards. Crops are being substituted for livestock, as the availability of more attractive cropping alternatives has increased the oppor- tunity cost of land and stimulated relocation of beef cattle fattening (and to a certain extent cattle raising). That process represents an important step toward the use of the natural resource more in line with its ecological potential. Finally, agronomists have increasingly become active participants in the production process. A large number of strong cooperatives in this area now have full-time agronomists on their staff. This important change has helped in the process of adoption of soybeans and at the same time facilitates further technological transfer. 40. In the Southern wheat belt of the Pampas adjustments have been slower. In order to preserve soil fertility, rotations between wheat, pasture and fallow land lasting up to 8 to 9 years are common. There is a general awareness of the high cost of this "natural" way to preserve soil fertility, but farmers maintain that chemical fertilizers are only a partial answer to the question of preserving natural resources. While the fertilizer adds chemical nutrients to the soil, it does not help to preserve the soil structure. On the other hand, several medium and small farms, often combining their resources in co-operatives, have adopted chemical fertilizers (ammonium diphosphate, 18-46-0) on wheat varieties of Mexican origin. Estimates suggest that 50% of wheat plantings in the area are already fertilized. Gains in yields have been on the order of 0.7 MT/ha. 1/ Analysis of the relative price changes of these items in other countries shows that in the case of tractors and harvesting machinery the farmer in the U.S. increasingly benefitted from relatively lower input prices. - 19 - 41. In addition to increased use of fertilizers, wheat yields have benefitted from the adoption of new varieties developed at INTA and at Criadero Buck during the last 4 to 5 years. Yields are on the order of 2.5 MT/ha for fertilized wheat. There is now a movement towards a more intensive use of the soil (i.e. three crops in two years), but this movement is weaker than in the North. The reason for this difference is the lack of a reliable summer crop to be planted immediately after wheat is harvested. Currently, sunflower seeds are planted, but that crop has not been as attractive as soybeans in the Northern Pampas. As a consequence, experimentation with short-cycle varieties of corn is under consideration. 42. The number of cattle has decreased in the Southern Pampas. Farmers sold off livestock to sustain their incomes during the difficult 1979/1980 season and substituted new varieties of wheat and sunflower which permit them to grow three crops in two years. While the sunflower area expanded, the wheat area remained at the historical average. Decapitalization of herds has not been compensated by other investments. Similar to the other regions, farmers have bought few new machines and tractors. They have, however, been adopting new practices and improved methods of production, which have become available in the last four to five years, and this has resulted in substantial increases in wheat yields and in sunflower output. 43. The need to adjust in the marginal areas of the Argentine interior became clear in the 1978-1980 period, when an increasing number of farmers went deeper into debt without opportunity to improve their efficiency and reduce operational costs. In the cotton growing area of the North, a financial relief program was instituted in 1980, but that program did not contain any specific actions to help in the readjustment process. Mechanical harvesting is the most promising cost-reducing technique in the cotton economy. In order to reduce labor costs, the individual producer must have access to the machine when it is needed. A carefully designed program to promote the adoption of the mechanical harvester would be a most appropriate project for the area. Farmers recognized the usefulness and the economic advantage of the cotton harvester. However, they did not have the resources to buy the machine and were reluctant to borrow on US dollar terms. Prices in 1980 were U$110,000 per unit, which is twice the price of an equivalent machine in the USA. Research is also needed to develop a winter crop to permit double-cropping and reduce land left fallow. 44. Fruit production depends heavily on purchased inputs, such as fertilizer, pesticides, boxes, trays, sulphite paper, cold storage and trans- portation. It also has a high labor component. Some purchased inputs could be imported at a price below that of similar inputs produced domestically, if purchased in large quantities. Time and effort are needed, however, to reach the minimum scale at which imported inputs can be fully used to force local producers to compete at lower prices. What happened in 1979/80 was similar to the Pampean farmers' experience with fertilizer and machinery or the cotton producers' purchase of herbicides, pesticides and tractors. While the adjust- ment process was almost instantaneous in the product markets (fresh apples, apple juice), price deceleration was taking place with a substantial lag in the factor markets of tradeable inputs. Consequently, farmers felt the full - 20 - impact of the exchange rate policy on the products they sold, while in order to benefit from reductions in their production costs they had to join efforts, invest time, and at the beginning incur higher cash outlays. In the interim their profit margin were eroded. Small-scale growers were slow in joining forces through joint orders for imported inputs, such as fertilizers and packaging materials. Economies of scale in this field mainly accrued to large producers, who often own vertically integrated operations. Agricultural Investment 45. There are no aggregate data on agricultural investment in Argentina. As a consequence, tractor sales are used to estimate the sector's investment trends in the late 1970s. Annual tractor sales, which had grown by over 50% between 1971 and 1976/77, reached a peak of almost 22,000 units in 1977. Sales declined sharply in 1978, however, and dropped further in 1979 and 1980, averaging less than a third of 1977 sales. Estimates based on average tractor life suggest that in order to maintain and renew the stock at the 1977 level, annual sales of tractors would have to be on the order of 13,000 units. Although this figure should be adjusted according to the average power of the units considered, it is clear that after 1978 annual purchases of tractors were substantially below the replacement requirement, implying a net decrease in the stock of power in the agricultural sector of Argentina. On the other hand, purchases in 1976 and 1977 were above the previous annual averages, suggesting that farmers may have accumulated excess capital stock which allowed them to cut back on their later purchases. 46. The financial reform of 1977 discontinued the subsidized credit with which most tractors had been purchased in Argentina. A relatively high capital stock in the mid 1970s, declining profitability in agriculture, producers' reluctance to accept current conditions for long-run credit, and high tractor prices explain the drastic decline in tractor sales for the last three years. Some reallocation of tractors within the agricultural sector probably occurred, given the increasing opportunity costs of keeping tractors idle or underutilized. - 21 - CHAPTER III IMPACT ON PRIVATE MANUFACTURING Overview 47. Output growth and structure. The manufacturing sector has been under severe pressure in recent years. Having fallen by 2.8% in 1975 because of major disruptions in the productive process, output in manufacturing dropped another 4.5% in 1976. A brief recovery of productive activities in late 1976/early 1977 was halted by the rapidly increasing interest rates. A short but severe cutback in industrial output of 7.9% in 1978 was followed by a strong recovery in 1979, which in turn was cut short in 1980 by import compe- tition and renewed high real interest rates. In brief, severe instability characterized Argentine manufacturing during the 1976/80 period; as a conse- quence, the level of manufacturing output in 1979/80 was only 15% above the 1971/72 level and just about equal to the previous peak registered in 1974. 48. Manufacturing's share in total value added fell from an average of 29% during the early 1970s to 26% in the late 1970s. Within the manufacturing sector the traditional branches continued to lose ground. Output in food processing, beverages, tobacco, textiles, clothing and leather fell by over 10% during the 1974/79 period. Expansion occurred in the chemical and petro- chemical industry as well as in basic metals and metallic products (Statistical Appendix, Table 3.2). 49. Domestic and foreign investment. Although no official data on industrial investment are recorded in Argentina, quarterly surveys undertaken by the research organization FIEL (Fundacion de Investigaciones Economicas Latinoamericanas) provide an index of manufacturing investment based on a sample of 140 firms, representing about 75% of total industrial value added The indices in Table 8 show that investment in the manufacturing sector fluctuated less than manufacturing output during the 1972-80 period. Between 1976 and 1980, capital outlays continuously increased, reaching 1971-73 levels in 1978/79. The 1979/80 figures show the need and ability of industry to re-equip itself despite the sector's evident difficulties. This tendency was strongest in the capital goods industry, which tripled its rate of investment between 1976 and 1980. As a consequence, the structure of investment has shifted, with intermediate and capital goods industries increasing their shares rapidly. 1/ 1/ The large increase in investment during that year was largely a conse- quence of massive investment in the automobile industry. (See Table 3.3 of Statistical Appendix.) - 22 - Table 8: OUTPUT AND FIXED INVESTMENT IN MANUFACTURING 1971-1980 (Index: 1972 = 100) 1971-73 1974 1975 1976 1977 1978 1979 1980 Manufacturing Production 100.0 110.3 107.0 105.0 111.2 99.2 108.3 104.5 Total Fixed Investment 96.3 78.0 88.4 73.5 82.6 91.3 95.9 122.0 Consumer Goods 89.8 69.5 70.6 54.7 69.2 45.6 50.3 101.7 a/ 83.7 b/ Intermediate Goods 91.5 81.0 102.2 84.3 90.0 108.7 113.9 84.4 Capital Goods 118.0 113.0 108.3 106.9 125.1 257.2 298.4 345.0 a/ Durable consumer goods b/ Non-durable consumer goods Source: FIEL, Indicadores de Conyuntura, various issues 50. Some evidence of growing investors' confidence is also given by the information available on foreign investment. Between March 1977 and March 1979, US$650 million of foreign investment, of which manufacturing investment partici- pated with 23%, was approved by the authorities. 1/ In 1977/80, total approved foreign investment nearly doubled, and approved foreign investments in manufac- turing grew from US$150 million to US$713 million. The 1979/80 foreign invest- ment commitments were higher and more diversified than the large capital commitments made during the early 1960s for the then new import-substitution industries. Over 20% of the approved foreign investment was planned for the modernization and restructuring of the automobile industry, and about 15% for the capital goods, chemical, pharmaceutical and food processing industries. 51. Exports and imports. Manufactured exports grew in absolute terms and as a share of total exports until the end of 1980. The increases were particularly strong in the years of domestic recession. While in 1979 these exports barely kept up with 1978 results in nominal terms, they recuperated remarkably in 1980. Strong internal demand explains most of the decline in exports in 1979--particularly in the case of automobiles. The discrepancy between the prefixed exchange rate and internal price increases seemingly did not play an important role in keeping exports from growing during 1980. The sub-sectoral breakdown shows that, with the exception of lower exports of transport vehicles and equipment, gains in sales abroad were particularly strong in chemicals and leather manufacturing (Statistical Appendix, Table 3.4). 1/ Major foreign investment has gone into oil and gas, which accounted for 34% of total foreign investment approved in the period March 1977- December 1980. (See Table 3.3 in Statistical Appendix.) The approved figures of US$1.84 billion are close to the actually disbursed amounts as registered by the Central Bank in Argentina's balance-of-payments. Between 1977 and 1980 foreign investment amounted to US$1.44 billion, and in the first quarter of 1981 US$367 million. - 23 - Table 9: EXPORTS OF INDUSTRIAL PRODUCTS 1976 1977 1978 1979 1980 US$ million 918 1,268 1,593 1,547 1,933 % Share in Total Exports 23.4 22.4 24.9 20.1 24.1 Source: Statistical Appendix, Table 3.4 52. Imports grew by 73% in 1979 and 55% in 1980. Although their relative participation in consumption, investment and GDP increased substantially, import shares are still modest compared to those of countries with similar resource endowment and income. The rise of the import/GDP ratio from 7% in the early 1970s to 8% in 1977/78, to 10% in 1979 and 12.3% in 1980 suggests that the opening of the economy only started in 1979, although capital goods imports had already played an important role in previous years. Increasing import competition for industry is indicated by the expanding share of imports to total industrial supply of manufactured products (Table 10). These ratios indicate a substantial degree of openness in the intermediate and the capital goods industries, and a relatively small but rapidly increasing import penetra- tion in the consumer goods sector. The overall import-supply ratio in industry rose from less than 12% in 1970/71 to close to 25% in 1979/80. 53. Employment and productivity. Overall unemployment has remained 'Low during the 1976-80 period, but data on industrial employment and hours worked reveal that the general tendency to reduce the labor force in the industrial sector since 1976 was starting to become important after 1978. Estimates of the National Planning Institute indicate that manufacturing employment fell by about 20% between 1975/76 and 1979. The reduction in the labor force was particularly sharp for the intermediate and capital goods industries, which reduced their combined labor force by nearly 30% (Statistical Appendix, Tables 3.7 and 3.8). Table 10: SHARE OF INDUSTRIAL IMPORTS IN SUPPLY OF THE INDUSTRIAL SECTOR, 1970-80 1970/71 1975/76 1979/80 Consumer goods 2.3 2.9 9.5 Intermediate goods 14.2 22.2 28.8 Capital goods 1/ 19.8 13.9 22.4 Total 11.8 16.8 24.9 1/ Includes other industrial goods. Source: Statistical Appendix, Table 3.5 - 24- 54. The cut in employment and increased investment in major manufactur- ing sectors led to substantial productivity increases in the 1976-80 period. Output per worker in 1979/80 was, on average, 30% above the 1975/76 level, and output per working hour realized a 20% gain. Most of these gains were accomplished during the last two years of the period and were strongest in the capital goods industries. 1/ On the other hand, there seemed to have been few productivity gains in the non-durable consumer goods industries. Table 11: OUTPUT PER WORKER IN MANUFACTURING 1973-1980 (1972 = 100) 1973/74 1975/76 1977/78 1979/80 Manufacturing 100.4 88.0 96.3 112.7 Consumer Nondurables 99.6 91.3 86.2 93.7 Durable Consumer Goods 101.5 85.2 96.1 119.1 Intermediate Goods 98.9 86.3 89.2 117.9 Capital Goods 107.3 95.8 119.6 137.6 Source: FIEL, Indicadores de Conyuntura, various issues 55. Inflation. While the adjustment process differed significantly from industry to industry, and even from firm to firm within a given branch of industry, a general trend of gradual price stabilization is discernible by the last four months of 1979. 2/ The deceleration of monthly price increases from an average of 7.7% during the first eight months of 1979 to an average of 3.8% after September 1979 was made possible by precipitous cuts in the rate of increase of production costs, which had started in July of the same year. Both of these trends are shown in Chart I and are contrasted with external price increases, the rate of devaluation, and the overall non-agricultural price index. 56. While the stabilization strategy was enacted in January 1979, the drop in inflation occurred only in the third quarter of the same year. Renewed excess demand did not spill over into imports right away; institu- tional rigidities of the Argentine import mechanism delayed the effects of the supply-oriented stabilization policies for a period of about nine months. 3/ Although most of the tariff redundancy seemed to have been eliminated by early 1979, as a result of the real appreciation of the peso in 1978, it was only 1/ While the slowdown of manufacturing output starting in mid-1980 reversed the trend of productivity gains, the index for output per worker was still at 110 in early 1981, i.e. close to the peak reached in 1979/80. 2/ Since 1976/77 the Asociacion Cristiana de Empresas (ACDE) has undertaken quarterly surveys of some 40 major industrial enterprises, covering topics ranging from changes in prices and costs to investment and produc- tion plans. See ACDE, Tendencias de la Industria, Buenos Aires, 1980. 3/ Imported inputs had been reduced by the end of 1978, and real wages equally were at a low. - 25 - at the end of the third quarter that competitive imported goods began to enter the Argentine market in significant amounts. Imports that had averaged less than US$400 million in previous months, jumped to US$700 million per month from September 1979 on, the import/GDP ratio rising from about 7% to 12% in the last quarter of that year. 57. The gap between international inflation, adjusted for devaluation, and domestic price increases opened up again in mid-1980, reflecting the apparent inability of industrial firms to reduce costs further. Moreover, not all firms and industries were under equal competitive pressures, as uneven protection continued to provide shelter for a number of industries. Real wages had grown strongly in 1979. Although they were brought down somewhat in early 1980 by those firms facing increased competition, for most firms produ- cing goods and services not affected by international competition real wages continued to increase during 1980. 1/ In addition, the macro-economic frame- work was seriously weakened by the financial crisis, which reinforced doubts in the minds of entrepreneurs and managers of the industrial enterprises about the sustainability of the new strategy. Who Did Well and Who Did Badly? 58. Prior to 1976, Argentine economic policy continually shifted between favoring urban industrial, import-substitution activities and rural, agricul- tural export activities. In 1979/80, however, both import substitutes and exports suffered from the low peso/dollar exchange rate. Meat packers and textile factories alike were closed. The main distinctions between the favored and unfavored enterprises were: (a) their capital structures and (b) whether they produced traded or non-traded goods. Industrial firms that had high debt-equity ratios were hurt, while more conservative firms with either a lower debt or a larger part of their debt in foreign currencies were less affected (at least until the maxi-devaluations in 1981.) Producers of goods that were exporting or that were subject to import competition suffered, while producers of services and of nontradeable goods prospered. Some firms were affected indirectly. Suppliers of synthetic textile firms did not suffer from direct import competition, but their markets weakened because of import competition in textiles; paper producers and glass bottle makers supplying packaging materials to domestic food processors suffered, as food product exports fell and imports rose. Diesel engine manufacturing was cut to one.- fourth of capacity, because the demand for domestic tractors and earth-moving equipment fell precipitously. 59. The hardest hit were firms where high peso indebtedness and rapidly decreasing import protection converged. The archetype was the fruit canning industry which formerly exported a significant part of sales and was now subject to import competition; was inherently seasonal and accustomed to financing high seasonal working capital requirements with debt; and, in addition, was saddled with high cost tin cans, because half of all tin plate used had to be purchased at high prices from SOMISA, the state-owned steel plant. Major subcontractors of this industry ceased to operate in 1980. Other hard-hit activities included 1/ The impact of high differential borrowing costs was probably more damaging for many firms. Chart I, however, only captures production costs. CHART I:AVERAGE MONTHLY COST AND PRICE INCREASES OF INDUSTRIAL FIRMS COMPARED WITH INCREASES OF WHOLESALE PRICES, DEVALUATION AND INTERNATIONAL INFLATION 1979/1980 10 - - - CONVERGENCE OF DOMESTIC INDUSTRIAL PRICES WITH INTERNATIONAL PRICES 6 4- --- INDUST COSTS --INDUST PRICES NA DOMES WHOLESALE ---- RATE OF DEVALUATION ----- - INTERNATIONAL PRICES ADJUSTED FOR RATE OF DEVALUATION, 1 2 3 4 1 2 3 4 1979 1980 - 27 - electronics (competition from the Far East), except color TV which enjoyed "infant" industry protection; meat packing and fishing (high input prices, relatively low international prices); some textiles (competition from Brazil, the Far East and elsewhere); paper products and some chemicals (a reflection of their customers' problems), tractors and earth-moving equipment (import competition plus weak investment demand from the agricultural sector) and associated engine and tire manufacturers. Major Characteristics of the Adjustment Process in the Three Branches 1/ 60. In order to gain a more detailed insight into the adjustment process of particular industrial branches, interviews were conducted with some 35 firms belonging to three major industrial subsectors: (1) textiles, clothing and shoes, which faced uneven import competition; (2) machinery and equipment, tradition- ally a strong exporter but under severe pressure of import competition in 1979/80; and (3) construction materials (cement, paints, tiles), which continued to enjoy natural protection. 61. Firms doing well were mostly in sectors where, for one reason or another, demand could not be readily satisfied by imports. Some of the products that enjoyed some natural protection, at least, in the short run were: -- bulky products with high transport costs, as in the case of construction materials and large equipment for public works; -- products that require technical services difficult to provide from abroad, such as maintenance and repair and/or renting of equipment; -- products that are made to order or otherwise respond to specific needs of the client (e.g., power generators and high quality garments and shoes adapted to local tastes); and -- intermediate products for a still protected industry (e.g. the car industry), interested more in reliability of supply than in costs. 62. If their product was standardized and not protected by any of the circumstances mentioned above, firms were forced to choose one or a combination of four survival strategies: (a) cutting costs and competing; (a) becoming importers and suppliers of services for the same products; (c) shifting production to goods enjoying some of the protective conditions mentioned above; or (d) reducing operations to a minimum, trying to cover fixed costs and waiting for a change in policy. Few producers in this latter category considered it feasible to reduce costs to the extent needed to make them competitive with imports. 63. Whether naturally protected or in process of adjustment, most firms experienced a sharp increase in their working capital needs, which were usually covered with short-term borrowing in local currency. One factor contributing to this increased financing requirement was that competition 1/ For a detailed description of the results of the survey, see Appendix II, "Adjustment Process of Selected Firms in Three Major Industrial Subsectors." - 28 - among firms took the form, inter alia, of extending longer credit terms to clients. Moreover, most firms reduced their work forces, whether as a result of more mechanization or of cuts in production, and were liable for the associated severance payments. 1/ As a result of increased borrowing for working capital, financial costs became a major cost item for most firms. This was reflected in a sharp reduction of the profit-sales ratio between 1979 and 1980 in nearly all the interviewed firms. According to them, the ability to keep financial costs at reasonable levels seemed to have been a major factor in the successful adjustment of firms, second only to their luck to be in, or their ability to enter in, one of the sectors that was naturally protected from imports. The Financial Problems of Industry 64. Beginning in 1977 Argentina's industrialists were forced to adjust the financial structures of their enterprises to an environment of ample but expensive credit. The financial reform (see Chapter IV) increased interest rates dramatically to a sector which traditionally had been heavily indebted to the banking system. The inflationary environment in 1977 and 1978 made it possible to shift higher credit costs to buyers via higher prices, but when the combined decrease of tariff protection and the real appreciation of the peso made cost-push inflation of traded goods impossible, the financial problems of industry multiplied, forcing a large number of manufacturing enterprises either to merge or close. The increasing financial bind expe- rienced by producers ultimately threatened the liquidity of the banking system. 65. One intention of the financial reform and the liberalization of the capital markets was for Argentine firms to gain increased access to interna- tional financial markets. This occurred to an increasing degree, but although most of the larger firms had opportunities to borrow abroad, they chose to keep one-third to one-half of their debts in pesos, paying considerably higher interest charges as insurance against a possible devaluation. Borrowing in dollars for small and medium firms was usually limited to suppliers' credits on material and equipment. Some of the smaller firms that were doing well and were renewing or expanding their equipment used substantial credits in dollars. These were mostly firms with some kind of special protection. 66. While the published balance sheets of the major industrial corpora- tions cannot reflect the whole array of problems which developed, they indicate where the major changes took place and tend to question some of the findings of the interviews of the selected enterprises. The most notable changes in the balance sheets of a sample of 78 firms between 1976 and 1980 are summarized in Table 12. They were: (1) erosion of profits after 1978 -- costs in general and production costs in specific rose faster than revenues; and (2) increased indebtedness but no decapitalization -- net worth declined relative to debt, with total leverage increasing from 0.7 to 1.1. The increase in indebtedness was mainly reflected in a pronounced jump of long-term debt, 1/ For senior workers with 10-year employment and over, severance payments were often higher than the salaries firms would have paid them in over two years of continued employment. - 29 - the share of which increased from 10% of total liabilities in 1976/77 to 20% in 1979/80. In the latter two years the share of foreign and domestic sources for long-term financing had about equal weight. 1/ 67. The changing structure of the aggregated balance sheets mainly reflects the changes which occurred in the large companies. These changes do not seem to signal any major financial problem. Increased use of long-term credit from external and domestic sources for capital investment seems to have been a logical choice for most companies whose retained earnings were temporarily squeezed by the stabilization policies. The increase in the leverage of the industrial firms would seem to be well within the limits of accepted international standards. Nevertheless, the deteriorated profit situation for three years, caused by the recession in 1978 and the apparent inability to control costs effectively in the wake of increased competition from abroad in 1979/80, was a clear sign that the adjustment process was painful. Table 12: Financial Ratios of Industrial Firms, 1976-1980 1976 1977 1978 1979 1980 I. Costs and Profits/Sales (all firms) 1. Production Costs 68.6 72.9 71.4 73.8 78.8 2. Financial Costs 9.3 10.4 13.0 9.8 8.5 3. Other Costs 18.0 15.1 18.6 17.8 18.0 4. Profits 4.1 1.6 -3.0 - .9 -5.3 II. Debt/Equity 1. All Firms .68 .85 1.00 1.05 1.06 2. Large Firms .68 .85 1.00 1.05 1.07 3. Small Firms .63 .76 .90 .93 .85 4. Firms with Traded Goods .60 .82 .91 .93 1.06 5. Firms with Non-Tradeable Goods .80 .90 1.16 1.23 1.04 Sources: Tables 3.10 and 3.11 1/ The fact that industrial corporations were able to contract external debt may indicate that the sample is biased toward relatively large and well established firms. The domestic medium and long-term loans were almost exclusively obtained from the three major government banks: Banco de la Nacion, Banco de la Provincia de Buenos Aires and BANADE. - 30 - 68. In addition to showing significantly higher losses from 1978 to 1980, small firms' balance sheets differ also in the changing structure of assets and liabilities. 1/ Their short-term debt increased relative to all other liabilities (from 34% in 1976 to 40% in 1979/80); at the same time net worth fell from 61% to 52% of total liabilities. On the asset side, inventory rather than capital investment went up, and accounts receivable declined. As a result of these changes, credit costs became a relatively heavy burden for small firms, leading to net losses in 1978 and after. While a few large companies went bankrupt because of overexpansion, smaller and medium-sized firms were facing the most serious financial problems in 1980. 69. Financial difficulties were widespread for firms producing tradeable goods. Firms of all sizes in that category indebted themselves rapidly because they most urgently needed new capital equipment to compete with foreign competition. As a consequence, their short-term debt went up from 28% to 34%, and their long-term debt rose from 9.5% to 17.5% of total liabilities from 1977 to 1980. Total leverage leaped from 0.6 to 1.1. With production costs rising, on average, from 73% to 78% of total sales, financial costs increasing from 9 to 12%, and administrative and marketing costs remaining at a level of close to 20%, losses for these groups of enterprises averaged close to 5% of sales between 1978 and 1980. Besides the differences in revenues, the most important differences between the producers of traded and non-traded goods in cost structure were again to be found in the financial area, in which producers of non-traded items seemed to have had a definite advantage. Because of their relatively low-risk position, banks provided credit at more favorable terms to those firms, giving them an additional advantage to their already privileged status of high protection. These firms experienced, however, relatively higher production costs than the import-competing group; as discussed below, this was probably a consequence of higher wage payments (see Table 3.13, Statistical Appendix). Profits, Protection, and Pricing 70. Information from balance sheets of a larger sample of corporations and an analysis of sectorial pricing provide further evidence of the uneven- ness of the adjustment process. In Table 13 a division has been made between those industry groups which faced increased external competition and those which continued to be protected, either by high tariffs (sugar, cigarettes, automobiles), high transport costs (cement, construction material), or low input costs (petrochemicals, shipbuilding, printing), as well as by direct government controls or contracts, (pharmaceuticals, industrial construction). Two characteristics stand out when the profitability patterns of the two groups are compared for the 1977-80 period. First, the "protected" goods (about 35% of manufacturing value added) enjoyed continuous profitability, which seemed to be only slightly influenced by the policy changes and swings of the economic cycle. 2/ On the other hand, the group which faced more stringent import competition (about 60-65% of total manufacturing value 1/ The line between large and small firms was drawn at an annual sales volume of US$7 million. 2/ The fact that the profit/sales ratios of Table 13 are higher than Table 12 can be explained by a larger number of firms engaged not only in manufacturing but also construction and tertiary activities, most of which were highly profitable in 1979/80. - 31 - added) experienced low profitability or losses. Although data for the first quarter of 1980 were available for only a relative small sample of firms, the difference between the two groups seems to have been widening (10 per- centage points in 1980 vs. 6-8 percentage points in previous years). This would be consistent with the previous observation that import competition really became effective in 1979/80. The dispersion of profitability in each industrial group reveals further that the reaction of firms which were forced to adjust was significantly different, with some of them being highly profitable while others suffered losses (see Table 3.14 of Statistical Appendix). Apparently, the program had the desired effect of punishing those firms which were unwilling or unable to cut costs and restructure their production programs. 71. Can the differences in profitability between traded and non-traded products be explained by different relative prices? Up to 1979 Table 13 answers this question in the negative. Both industry groups experienced nearly identical price increases. The situation changed drastically, however, during the last quarter of 1979 and up to the fourth quarter of 1980. While the "competitive" branches were only able to raise prices by an average of 60%, the protected industries increased prices by 90%, i.e., 20% above the average of the non-agricultural wholesale price index (see Table 3.12 of Statistical Appendix). At the same time as the protected producers were able to absorb a substantial increase in labor costs, the discipline of competition forced firms of the second group to cut employment more drastically and lower wage adjustments for at least a number of months. 72. Wage and employment data reveal that despite a continuous reduction in manufacturing employment, total labor costs must have risen substantially in real terms during 1979/80. While real wages (industrial wages deflated by the consumer price index) rose by 17% between 1977 and 1980, average real wage costs for industry as a whole (industrial wages adjusted for hours worked and deflated by industrial prices) increased by 44%. Real wage costs increased by over 50% for the "protected" group and by about 40% for the "competing" group of enterprises between 1977 and 1980. At the same time productivity rose by only 28% for the first group and 11% for the second group of enterprises. Out of the nine branches which actively competed with foreign goods in 1979180, only two - textiles and clothing - were able to keep their wage costs close to price increases, although all of them reduced employment and the number of working hours in 1980. This inability of many firms to reduce labor costs in 1979/80, together with the maintenance of relatively high nominal interest rates at times of decelerating inflation and increasing selling costs, squeezed profits of a large part of the industrial sector decisively. 73. The fact that over 30% of industry was virtually unaffected by import competition posed a problem to the Government's plan to have the price behavior of tradeables rapidly affect non-tradeables in the economy, as shown by the development of the consumer price and the construction price index. Price changes occurring among major sectors and even within the industrial sector itself were increasingly divergent in 1979/80. 1/ While the reforms in the 1/ A recent study showed that industrial prices in 1980, both relative to Argentine agriculture and vis-a-vis foreign producers, were higher than ten years earlier, a period which was characterized by substantially higher average protection and numerous price controls. See D. Cavallo and G.A. Parino, "Apertura de la Economia y Cambios en los Precios Relativos," Novedades Economicas, Cordoba, 1980. - 32 - Table 13: Profits, Prices, Labor Costs and Employment of Firms Producing Traded (T) and Non-Traded (NT) Industrial Goods, 1977-1980 1977 1978 1979 1980 1. PROFITABILITY (Profit/Sales in %) T Firms 1.8 -1.3 0.4 -2.9 NT Firms 7.4 6.2 8.2 6.8 2. PRICES T Firms 100 256.0 614.7 956.4 NT Firms 100 252.3 584.3 1099.7 3. AVERAGE HOURLY WAGES T Firms Nominal 100 256.2 746.6 1609.7 Real a/ 100 100.7 121.5 168.3 NT Firms Nominal 100 262.3 792.4 1857.7 Real b/ 100 104.0 135.6 168.4 4. EMPLOYMENT (Hours Worked) T Firms 100 92.3 93.3 82.5 NT Firms 100 92.0 94.9 91.6 5. REAL WAGE COSTS /(3x4):100/ T Firms 100 92.4 113.4 138.8 NT Firms 100 95.7 128.7 154.3 6. OUTPUT T Firms 100 86.8 99.7 91.4 NT Firms 100 90.6 110.6 117.4 7. PRODUCTIVITY T Firms 100 94.0 106.9 110.9 NT Firms 100 98.5 116.5 128.2 a/ Deflated by price increases of T-Firms b/ Deflated by price increases by NT Firms SOURCES: Statistical Appendix Tables, 3.12, 3.13, 3.14 - 33 - tax and tariff structures were expected to have an equalizing effect on protection and relative prices within the productive sector in 1981, the discrepancies between tradeables and non-tradeables seemed to have been strengthened by expansionary fiscal policies. 1/ 74. In summary, after a long period of overprotection, industry was confronted with positive real interest rates, reductions in external tariffs and, most importantly, with a real appreciation of the peso which amounted to about 40% within three years. As a result the industrial sector went through a rather difficult adjustment period which had positive and negative implica- tions for policy making in Argentina. Import liberalization together with the exchange rate revaluation induced industry to modernize, with investments in machinery and equipment rising to record high in 1980-81. While production growth for the domestic market could not be maintained, manufacturing exports, which were able to just keep up in nominal terms between 1977 and 1979, in- creased from US$1.5 billion in 1979 to US$1.9 billion in 1980. Price increases decelerated, particularly in the import-competing group of enterprises which made up over two-thirds of industry, but cost increases did not. As a conse- quence, profits turned into losses and eventually business failures. Bank- ruptcies of manufacturing firms rose sharply from a$22.8 billion of liabilities in 1971 to a$735 billion, a six-time increase in real terms. (See Table 3.18 in Statistical Appendix.) In US dollars at the 1980 exchange rate, these bank- ruptcies amounted to less than US$1 billion. As will be discussed in the following chapter, this seemed to be only the tip of the iceberg. One major reason for many enterprises' survival was the continued lending of financial institutions, the portfolios of which deteriorated to an alarming degree in the 1979-80 period. 1/ The fiscal problems and their role in the 1979/80 stabilization effort will be discussed in Chapter V. - 34 - CHAPTER IV THE FINANCIAL SECTOR AND THE ADJUSTMENT PROCESS The Financial System 75. The financial system in Argentina consists of the Central Bank (BCRA), four national banks - Banco de la Nacion (BN), Banco Nacional de Desarrollo (BANADE), Banco Nacional Hipotecario (BNH), and Caja de Ahorro y Seguro (CAS) - 31 provincial and municipal banks, 177 private commercial banks, 230 financial companies and 28 mortgage banks. The total number of financial institutions declined from over 700 entities in the mid-1970s to 470 in 1980. As a consequence of the 1977 legislation favoring the estab- lishment of all-purpose commercial banks, the number of commercial banks nearly doubled, while the number of finance companies fell by 50% during the same period. This process of consolidation and restructuring of the banking system can be expected to continue as the weaker financial institutions are either absorbed by merger or go out of business. 76. The previous system. From September 1973 until May 1977 a system of nationalized deposits was in effect in Argentina for the second time in the post-war period. In the centralized system deposits were accepted on the account of the Central Bank, which paid interest, while financial entities received a commission fee for their intermediary role. Banks were responsible for credit and investment management, while the Central Bank established limits, conditions and guarantees on bank portfolios. Levels and direction of credit were determined through rediscount policy, which attempted to be selective in two respects: (a) channeling credit through particular financial interme- diaries according to criteria unrelated to the volume of deposits received by those same financial intermediaries; and (b) channeling credit to particular economic activities and particular geographical regions. The explicit objectives of this system were to maximize monetary control by the Central Bank and to distribute financial resources according to the requirements of the economy. 77. Nevertheless, the system had negative effects. Credit redistri- bution among financial entities affected their profitabilities differently and contributed to destroying incentives to compete for customers. With respect to the allocation of credit, successive policies used interest rates differen- tiated according to sector, region and time of year, as a tool. Conceptual and practical difficulties of defining criteria for credit assignment and the impossibility of controlling the marginal use of resources prevented the system from attaining its goals, the result being an inefficient assignment of resources and high administrative costs. 78. The process of accelerating inflation that started in 1974, jointly with the interest rate policy pursued during the period, resulted in negative real interest rates for most financial assets and led to changes in the system of centralized deposits. A non-centralized sub-system in the form of an - 35 - acceptance market developed. Operations based on term deposits, even though operating formally within the centralized system, started to work in fact in a decentralized way, since banks were allowed automatically to issue credit in relation to the amount of such deposits that they captured. 1/ The system resulting from these changes was a hybrid, composed, on the one side, by a centralized system for which a 100% reserve requirement was in effect and, on the other, by a sub-system with a zero-percent reserve requirement. The average reserve requirement implicit in the system depended on the distribution of deposits between the two sub-systems. Since the sub-system with no reserve requirements was the one that experienced the fastest growth, the actual average reserve requirement for the system tended to decline over time. The financing of the public sector deficit and the level of rediscounts increased at the same time. Thus, the behavior of both the monetary base and of the multiplier led to an explosive increase in the money supply. 79. The new system. The economic program announced on April 2, 1976 included a profound reform of the financial system among its goals. This reform reintroduced the full intermediation role of commercial banks and provided a legal and regulatory framework intended to increase competition and efficiency. One of the first measures taken was the conversion of the central- ized deposit system to a new system where monetary control was achieved through the application of a minimum reserve requirement and through open-market operations. Given the distortions in the former system, a detailed analysis of technical questions was needed before the change could take place. The new system started to operate on June 1, 1977. 80. The legal basis for the new Argentine financial system is provided by Law No. 21.495 concerning the decentralization of deposits and Law No. 21.526 regarding financial entities. The latter law gives the Central Bank supervisory powers over the banking system and establishes its role in the determination of monetary policy through the application of a minimum reserve requirement and through open-market operations. It reserves monetary interme- diation to commercial banks, the only entities allowed to accept current deposits, and allows complete freedom of interest rates; it establishes competition as the means to obtain an efficient financial system and thus permits relatively easy entry into the market; and it establishes a guarantee system for deposits in national currency in all financial entities. 81. The impact of the reform on major monetary and credit variables has been far reaching. The deregulation of interest rates resulted in mostly positive real interest rates for depositors, and thus, for the first time in decades, Argentine savers have been able to protect their savings against inflation in the domestic financial markets. The increase in savings chan- neled through the banking system progressively raised the monetization of the Argentine economy. The ratio between monetary assets (M3) and GDP jumped 1/ For a while this system was subject to interest rate regulations, but starting in June 1975 banks were permitted to set interest rates freely on loans and deposits. - 36 - from 8% in 1976 to 18% at the end of 1978, 21% at the end of 1979 and 30% in mid-1980 (see Table 14). The increased monetization allowed a two-fold real increase in the volume of domestic credit available through the financial system. At the same time, a major shift in the distribution of that credit occurred. In 1976, credit to the private and public sectors accounted for 64% and 36%, respectively, of total credit; as of December 1980, the share of credit to the private sector had risen to 77%. 82. Even though the financial reform has been successful in promoting the monetization of the Argentine economy, stimulating savings and expanding banking credit, the Argentine banking system faced increasing problems, part of which were directly related to the rapid expansion of monetary assets and the lack of supervision of the financial intermediaries, and part of which were caused by the weakening financial position of the industrial sector. The main issue relating to the Argentine banking system and its operations has been the large scale - if not the excessive - short-term lending of the financial institutions at highly fluctuating interest rates. As a consequence, this chapter discusses: (i) the short-term and unstable nature of its deposits and the associated difficulties of extending the maturities of loans; (ii) the volatility and excessive levels of interest rates; and (iii) the weak portfolios of many private domestic banks, which led to numerous failures and increased participation of public and foreign banks. Monetary Policy and Its Impact on Banking 83. Monetary and credit policies from 1976 to 1980 were an integral part of the economic stabilization and reconstruction program, aiming at re-monetizing the economy and at improving resource allocation through the reformation and liberalization of money and capital markets. Since the fiscal deficit had become the major source of monetary expansion in 1975 and early 1976, the emphasis of the stabilization program was first on controlling public expenditures, raising tax collection and covering the remaining deficit by non-inflationary finance. For the monetary authorities it meant reducing deficit financing by the Central Bank and attracting private funds for Treasury obligations. There was no explicit credit policy to the private sector, except that credit restrictions, recession and unemployment were to be avoided. Until late 1978, attempts were made to control total money supply and, with it, total credit. With the adoption in early 1979, however, of the prefixed exchange rate within the conceptual framework of the monetary approach to the balance of payments, mobility of external capital became a keystone of economic policy, leaving the monetary authorities to control only net domestic credit. With money and total credit supply allowed to adjust automatically to demand, real credit and real money expanded significantly faster than advances in real output of growth and services. While part of that increase may have been justified as part of the recuperation process from the low levels of liquidity of the mid-1970s, the overexpansion of the banking sector and the need to close over thirty banks and other financial intermediaries in 1980 suggest significant financial mismanagement. Table 14: Monetary Indicators, 1974-1980 (year-end data ) 1974 1975 1976 1977 1978 1979 1980 Liquidity Coefficient M /GDP x 100 14 9 7 5 6 6 : M2/GDP x 100 27 13 12 14 18 21 26 M3/GDP x 100 18 21 30 Banking Deposits (Percent Distribution) Demand Deposits 26 17 Consumers Saving Deposits 8 7 Fixed Term Non-transferable 22 27 Fixed Term Transferable 36 42 (Saving Deposits Over 30-days) (23) (38) Banking Credit (in 1975 bill. $a) 553 529 316 420 451 556 662 To Public Sector 219 241 114 131 120 120 153 Share of Total 40 46 36 31 27 21 23 To Private Sector 334 288 202 299 337 436 509 Share of Total 60 54 64 69 73 79 77 Monthly Interest Rates Depositor 10.5 7.0 6.0 5.4 Borrower 1.7 3.3 3.3 13.6 7.9 6.8 6.4 SOURCE: Table 4.1 to 4.4 of Statistical Appendix. /1 except for 1980: end of June - 38 - 84. Bank credit term structure. Faced with inflation-conscious clients, the Argentine banking system operates on very short-term deposits, the bulk of them being 30 days or less. At the same time, most Argentine firms have traditionally financed their long-term capital investments with short-term funds, which are normally rolled over. Although the system possesses mechanisms that, in principle, should have allowed the appearance of long-term credit, they have been slow in coming and were implemented hesitantly. In late 1977, loans were indexed with the wholesale price index--the only one allowed by the Central Bank - but a series of problems, some resulting from the high and extremely variable levels of both inflation and interest rates, have reduced the usefulness of that mechanism. The lowering of inflation levels would automatically solve these problems, because it would decrease variability of inflation and with it the frequent and significant shift of relative prices. 1/ 85. Beyond the general problem of high inflation, the system of indexa- tion adopted was seriously flawed. Since interest rates were pegged to price developments in the past, both lenders and borrowers knew the index applicable to the first adjustment a month a priori and could compare the cost of an indexed credit with that of an alternative 30-day nominal interest credit. Such a comparison would favor either borrower or lender, depending on whether the rate of inflation was increasing or declining. There would thus be strong incentive for one or the other to postpone the operation and replace it with a 30-day operation. Although at a certain point in time both alternatives would have the same cost, there was still another problem. Given the high variability of real interest rates and the fact that most of the banks' funding is not indexed, the supply of funds for indexed loans was limited. In times of declining inflation and high nominal interest rates, such as occurred in late 1980, lenders would realize negative spreads and, thus, banks with large indexed loan portfolios, would incur losses. 2/ 86. The variability of real interest rates was soon recognized as a problem by the Central Bank, which proposed in 1978 to use the "testigo" rate, an average interest rate on deposits from a sample of 50 commercial banks, as an index for monetary correction. It was hoped that this index would be instrumental in developing the long-term sector of the banking credit market. Once related legal problems were resolved, the testigo rate was introduced in April 1980 as the basis for indexation for all credits and deposits of the banking system. The index grows daily at a rate equivalent to the testigo 30-day 1/ See Table 1.2. For a discussion of the problems of a highly variable inflation, see IBRD, Economic Memorandum on Argentina, Report No. 2988-AR, Annex B. 2/ This situation was especially critical for the National Development Bank, which had over 80% of its loans indexed by the wholesale price index in late 1980. - 39 - rate. Loan or deposit operations are agreed in terms of the future evolution of the index, setting the base at most one or two days before the loan agree- ment. Even though prices and interest rates follow the same general trend, the latter have been more stable. As a result, the testigo index produces a. smoother adjustment than would the wholesale price index. 87. The Argentine Central Bank has been considering other mechanisms that would allow the banking system to extend the terms of its loans beyond the standard 30-day period. One idea was to establish different deposit insurance coverage according to the term of the deposit. A 180-day deposit, for example, would be fully insured, while a 30-day deposit would only be partially insured. By this mechanism the public could be expected to switch its preference toward longer-term deposits, and the banking system could extend the average maturity of its loans. Another way of extending the term structure of the credit market would be to use the inter-bank market for call money which developed in 1978/79. The call-money rate is well publicized, with the market apparently being quite transparent. Argentinian banks could use that market as a basis for making syndicated long-term peso loans with a spread over the call-money rate adjustable over time. The idea is to use the model of the Eurodollar market, which essentially is an interbank market for call money and short-term deposits. 88. The changing levels of interest rates. A recurrent complaint of the business community in recent years in Argentina has been the high level of interest rates. As seen in Chapter III, many firms have experienced difficulties because of high financial costs, which eroded profits rapidly between 1978 and- 1980 (see Table 3.10 in Statistical Appendix). After the initial surge in 1977 and early 1978, monthly real interest rates were below 1% for over 18 months. When the sudden deceleration of inflation occurred in September 1979, the adjustment of interest rates lagged for about three months. In the first quarter of 1980 real interest rates again began to decline. This decline was interrupted, however, by the downfall of three important banks, which precipi- tated a run on private banks' deposits and consequent Central Bank intervention. After a relatively short and rapid increase, interest rates again declined in mid-1980 to the levels prevailing at the beginning of the year. However, during the second semester of 1980 and the first quarter of 1981 interest rates again increased rapidly in real terms, this time propelled by the rapid outflow of foreign exchange reserves. - 40 - Table 15: Nominal and Real Monthly Rates of Interest (Quarterly Average) Prime Rate for Borrowing Rate for Domestic Loans Foreign Loans Year Quarter Nominal Real Nominal Real 1977 I 4.5 -3.7 7.8 -0.4 II 5.5 -0.7 5.7 -0.5 III 8.2 0.3 7.2 -1.3 IV 13.2 4.7 8.8 0.3 1978 I 11.3 3.2 7.6 -0.5 II 8.2 0.6 3.9 -3.7 III 7.7 1.0 4.1 -2.6 IV 7.6 -0.7 6.1 -2.2 1979 I 7.2 -1.5 5.9 -2.8 II 7.2 -1.5 5.6 -3.1 III 7.7 -1.4 5.1 -4.0 IV 7.1 4.8 4.7 2.4 1980 I 6.0 1.9 4.3 0.2 II 5.5 0 3.5 -2.0 III 6.2 3.3 3.1 0.2 IV 5.6 2.7 2.8 -0.1 1981 I 8.8 3.8 7.3 2.3 SOURCE: Tables 1.2 and 4.4 - 41 - 89. While real interest rates turned slightly negative after the initial rapid increase in 1977/78, Argentine banks have been paying positive real rates on deposits since September 1979. This resulted in part from the slowing of the inflation rate, while expected inflation - based on past rates of inflation - remained higher than actual inflation. In general, reduction in interest rates on loans would require expectations of a permanent reduction in inflation, a similar lowering of the expected devaluation of the exchange rate, and a lowering of the spread with which the banking system operates. 90. With total freedom of capital movements, external funds were expected to play a major role in establishing upper limits to interest rates. Internal interest rates were not to surpass the limit given by international interest levels plus expected peso devaluation. As Table 15 shows, however, an actual gap of 2 percent per month remained even in 1979 and early 1980, when expecta- tions of impending devaluation were of little importance. With the banking crisis in April 1980, expectations of a substantial peso devaluation intensified. The deteriorating current account balance, the imminent change in government, changes from the original devaluation schedule to 1% per month (October-December), and 2% per month (January 1981), and finally the 10% devaluation in February 1981 fed those expectations and eventually forced the monetary authorities to raise interest rates drastically in an attempt to halt the unsustainable loss of reserves. 91. Lending rates could also be lowered with a reduction of the spread charged by the Argentine banking system. The spread, as measured by the difference between rates on 30-day loans and deposits, was 3% per month at the beginning of 1978; by the beginning of 1979 it had declined to 1%, but it in- creased to around 1.5% in 1980. These levels are high in comparison to other national banking systems. The question is whether there was much room for further reductions in the spread charged by Argentine banks. Among the factors that affect the level of the spread are: (i) administrative costs of loans and deposits; (ii) the minimum reserve requirement of the banking system; (iii) interest earned on reserves at the Central Bank; (iv) competition within the banking system; (v) the risks of financial intermediation; and (vi) the social security tax on bank gross revenues for the benefit of bank employees. 92. The reserve ratio was set at 45% in July 1977 and then progressively lowered (44% in December 1977, 29% in December 1978, 16.5% in December 1979; 11% in October 1980), thus contributing to the reduction of the spread. The fact that Argentine banks operate on a 7-day or 30-day basis on deposits and loans, however, has resulted in one of the highest operational and administra- tive costs of any banking system. Even though banks have made efforts in cutting personnel and administrative costs by computerization of services, as long as inflation remains high and bank operations are of a short-term nature, one cannot expect dramatic reductions in banking costs and the spread. More- over, the spread is affected by the 2% tax on gross revenues which by law goes to benefit bank employees. The high spread can hardly be attributable to a lack of competition. With over 400 banks and financieras surviving in 1980, - 42 - competition in the Argentine banking market has remained keen. A different question, however, is whether there are substantial economies of scale in the banking industry to be achieved by concentration or merger of banks, which would lead to a reduction of costs and ultimately the spread. The question is thought to be significant and is being investigated by the Central Bank. 93. The level of the bank spread is also influenced, of course, by the perceived risk of financial intermediation. A first component of that risk is the risk of default, which was perceived to be on the rise during 1980 and probably contributed to the increase in spreads that occurred in that year. The second component is the risk of variability in the real rate of interest. Although with the general decrease in inflation, its variability should also have been reduced, strong fluctuations persisted. 94. Portfolio situation of banks. By all accounts the portfolios of most Argentinian banks are in a difficult situation. Official data show that less than 5% of total loans outstanding at the end of 1979 were in arrears. A more recent Central Bank survey of the portfolio structures of 200 banks set the figure at 40%, but that estimate included all loans which were in arrears by 10 days or more, an unusually narrow definition of "bad" debt. Another way to get a rough idea about the really troubled loans is to add up the debts of those large companies which were at the verge of bankruptcy and the assets, net of the loan to those large corporations, of the banks forced to close by the Central Bank during 1980; that amount reached about US$7 bil- lion by late 1980, which was equal to 20% of the banking system's outstanding loans. 1/ 95. The reasons for the portfolio problem are numerous. The financial weakness of industrial firms has been transferred to their creditors, who were not well prepared in risk assessment. Two generations of Argentine bankers had grown accustomed to a risk-free banking activity under the previous system of centralized deposits. With the establishment of a free banking system, many Argentine bankers failed to take account of the new risk component. The difficulties in risk evaluation were compounded by an upheaval in the economic environment. The short-term impact of the tariff reform and exchange rate changes made projections of the future of particular business sectors and firms from past experience difficult. 96. Another dilemma arose from the 100% guarantee system for bank depo- sits. That guarantee system was introduced to ensure public confidence in all financial institutions, irrespective of their being private domestic, foreign or official ones. The system, however, allowed weaker banks to compete for deposits with above-market deposit rates and was not protected by adequate bank supervision from the Central Bank. Naturally the banks offering higher deposit rates had to accept above-average lending risks. While guarantees 1/ Aldo Ferrer, "Varios propuestas para implementar una linea de redescuento orientada al sistema productivo," Ambito Financiero, October 31, 1980. - 43 - were later lowered, many Argentine banks and financieras still offered higher-than-average interest rates and accepted higher-risk loans. The chances of bankruptcies, such as the ones that occurred in March 1980, continued to be high in late 1980 and early 1981. Resource Mobilization and Private Sector Financing 97. The liberalization of domestic and external capital markets enabled the Argentine banking system to attract substantial funds, maintaining the capacity of the banks to finance private sector activities and to do so at positive real rates of interest. Table 16 shows the sources of finance for various periods over the last 15 years. The participation of self-financing decreased over time, falling from over 80% in 1967/69 to 70% in 1970/74 and 57% in 1973/74, but recovering to 63% in 1977/78. Between 1970 and 1974 two thirds of investment was financed through depreciation allowances and retained earnings. Of the remaining one-third, a large part was financed through credit subsidies. In 1975 all loan financing, which had increased to over 40% of total investment finance, involved either credit or exchange rate subsidization. In sharp contrast, loan financing in 1977-80 was fully paid with positive real interest rates. It is true that in 1967/69 borrowers also had to pay positive real interest rates, but during those years retained profits and depreciation made up 75% of total investment financing in contrast to 60% in 1977/80. In addition, direct foreign investment amounted to 5.3% of total investment in the earlier period, while it was only 2.1% of total investment during the 1977/80 period. In sum, there is evidence that while the financial system provided ample funds to the private sector, including funds from abroad, for the first time in many years these loans required profitable investments to generate the necessary cash for repayment or reinvest- ment. As the financial statements of the 70 corporations surveyed show, such profits were not forthcoming for many industrial firms between 1978 and 1980. 98. Manufacturing enterprises and the rest of private sector activities should have benefitted from the growth of the financial system in Argentina during the last five years. Ample credit was made available at annual real interest rates below 10% p.a. most of the time. While these averages do not reflect the sharp fluctuations over time and the differences in costs between foreign and domestic funds, it would seem that the reductions in subsidies through the combined exchange rate and interest rate policy should have led to a better allocation of resources than was actually achieved. As discussed earlier, the unequal protection within the manufacturing sector and the excess demand from the nontradeables sector prevented the liberalization effort in the financial markets from being rapidly translated into the markets for goods and services. Annual investment recovered from its 1975/76 low, but the efficiency of investment apparently did not. - 44- Table 16: SOURCES OF INVESTMENT FINANCING Private Investment and Its Financing 1967/69 1970/72 1973/74 1975/76 1977/80 Gross Private Investment (in 1970 billion $a) 10.15 13.06 13.20 18.80 12.63 Financing (in % of Gross Private Investment) 1. Depreciation and retained earnings 75.1 66.3 66.2 55.5 60.0 2. Equity Capital 6.0 4.1 1.3 1.1 2.7 - Direct foreign investment 5.3 3.0 0.9 0.8 2.1 - Stock issues 0.7 0.8 0.4 0.3 0.6 3. Loan Finance 18.9 29.9 32.5 43.4 37.4 - Domestic 18.2 19.9 34.1 39.1 24.8 - Foreign 0.7 10.0 -1.6 4.3 12.6 Gains and losses from financial markets operations as % of total loan financing -8.8 23.9 18.4 90.6 -3.8 Source: Statistical Appendix, Table 4.6 It is important that future policies pay particular attention to eliminating the distortions in the tariff structure and containing public expenditures and, with it, demand for non-traded goods and services. In the financial system, the most important task will be to improve portfolio management. Several private banks were reckless in lending to customers with dubious investment projects, and the Central Bank did not exercise the control necessary. A great number of industrial enterprises have remained in financial difficulties and will, therefore, also affect the banking sector negatively; before both sectors recover, it will be necessary to allow some of the weakest enterprises in each category to disappear. A return to credit control and/or subsidies would be self-defeating. - 45 - CHAPTER V SUMMARY CONCLUSIONS AND OBSERVATIONS A Summary of the 1976-80 Program and Results 99. Following upon a long history of high inflation, intermittent balance-of-payments crises, and inward-looking industrialization behind high protective barriers, the Argentine Government in 1976 introduced a new economic program with the joint objectives of short-term price and balance-of- payments stabilization and long-term restructuring of the economy in accordance with the nation's comparative cost advantages. While an effort was begun immediately to control aggregate demand by reducing the fiscal deficit and the overall size of the public sector, the primary vehicle for achieving the above objectives since late 1978 was the opening of the economy to the competitive pressures of international trade. Thus, in December 1978 schedules were introduced for the gradual reduction of import barriers and the adjustment of the exchange rate at a gradually declining pace. In this way, the pricing freedom of Argentine producers would be increasingly constrained by competition from imported goods, and they would be compelled to increase efficiency and. reduce costs or go out of business. The reduction of costs, initially expe- rienced in the tradeable goods sectors, would be transmitted through the goods and factor markets to the non-traded sectors, as well. The availability of cheaper imported goods and reduction of domestic costs would benefit not only consumers but also spur exports of goods in which Argentina enjoyed a compara- tive advantage. 100. Because of rapidly increasing aggregate demand in the face of institutional barriers and continued high protection, a lag of some eight months occurred before import competition began to have the expected impact on domestic prices in 1979. During 1980, however, annual inflation measured by the wholesale price index was reduced to 58%, compared to 129% in the year prior to the policy's inception. Moreover, investment trends in industry and increasing intensity of land use in Pampas agriculture suggest that positive restructuring trends were underway in at least some sectors. Important struc- tural reforms were also carried out in the financial sector, which succeeded in remonetizing the economy and should contribute over time to both higher savings and their more efficient intermediation. 101. On the other hand, early success in reducing the public sector deficit was not sustained, and soaring interest rates in 1980 were contributing to an industrial recession. At the same time, a weather-related poor harvest and deteriorating export incentives, combined with the now rapid growth of imports, caused a sharp deterioration of the current account of the balance of payments. With increasing signs of financial difficulties in the industrial and banking sectors, there were increasing doubts regarding the Government's ability to hold firm in its policy, particularly with regard to the exchange rate. Pressures were also mounting to restore the previous levels of import protection. Uncertainties were compounded by the long prior history of aborted Argentine stabilization programs and by the imminent inauguration of - 46 - a new Administration which had not clearly stated its policy intentions. A 10% devaluation of the peso in February 1981 was not sufficient to allay these fears and, indeed, appeared to intensify expectations of a new, larger devaluation, which did later occur. With large-scale devaluation came the reacceleration of inflation and the perception that one more stabilization effort had failed. An Evaluation of the Stabilization/Restructuring Program 102. In reviewing the 1979-1980 experience, three principal factors appear at the root of the problems which led to at least a partial abandonment of the strategy in early 1981. The first of these factors was the continuation of high aggregate demand emanating in part from the deficit of the public sector which, although reduced in 1979, rose again to an estimated 7% of GDP in 1980. Consequently, the full burden of price stabilization fell on trade policies, and the real appreciation of the exchange rate was more rapid than otherwise might have occurred. 103. The second, related factor was the considerable tariff inequalities that existed at the beginning of the process, the slowness with which trade barriers were effectively lowered, and the resultant lag with which import competition came to play its price-restraining role. The result was again a more rapid appreciation of the real exchange rate and a serious distortion in the impacts of the stabilization strategy among the various sectors of the economy. The most immediate effects were on those sectors of the economy with the lowest initial levels of unused protection and, in particular, on the export sector, whose real receipts were quickly reduced by the appreciating exchange rate, but whose costs remained high because their inputs came largely from the non-traded and/or still protected sectors of the economy. 104. Thirdly, the freeing of interest rates, while already effected in 1977, led to a heavy debt burden on financially weak firms, who were able to stay alive only so long as they could pass on their increased costs to higher prices. When this became increasingly difficult in late 1979 and 1980, many of them were forced to cease operations or to merge. To some extent, enter- prises may have exacerbated their own financial distress by making employment, investment and borrowing decisions under the assumption that policies would soon change. As such expectations intensified, particularly as regards the exchange rate, they eventually became self-fulfilling. 105. All of these factors converged in 1980, as the public sector deficit widened, the external sector current account worsened by the effects of a bad harvest and the now rapid flood of imports, and the April 1980 financial crisis set off the first wave of gathering pressures on the capital account of the balance of payments. The deteriorating external accounts led to an increase of already high domestic interest rates (reaching an average level of about 30% in real terms in 1980), which, in the face of declining industrial production, further intensified the financial squeeze on domestic enterprises and fears for the health of the financial system. - 47 - 106. One puzzling aspect of economic developments during 1979 and 1980 was the high rate of advancement of real wages despite slowing economic activity and a substantial reduction of employment in the manufacturing sector. After increasing 4% in 1977-78, average industrial wages rose by another 22% in real terms during 1979, with some higher-skilled workers receiving increases of over 30%. After a brief lapse in early 1980 - partic- ularly evident, as might be expected, in the traded-goods industries - real wages throughout the economy resumed their upward trend. Between September 1979 and September 1980, despite layoffs and declining revenues, the total wage bill of industrial enterprises increased much faster than prices for both "protected" firms and those exposed to foreign competition. 107. Several possible explanations may be offered for these seemingly contradictory tendencies. First, available unemployment data suggest that labor demand remained strong elsewhere in the economy, as the services sectors apparently absorbed the layoffs from manufacturing activities. Although much of the increased service employment was reported as "self-employed" and may have involved part-time jobs, incomes derived from those jobs were reported to be as high or higher than previously received. Many small businesses are alleged to have been started with the generous severance payments accompanying layoffs from the industrial sector. A second explanation rests on institu- tional rigidities in the Argentine labor market, where wage increases among the more highly skilled workers or in the most protected sectors - e.g. autos - pull other wages with them irrespective, at least for a time, of market forces. 1/ Finally, some part may have been played by employers' expectations of an imminent policy change. Believing that their present financial bind would thereby be resolved, they may have been more willing to grant wage increases in order to hold on to their work forces and avoid unnecessary severance payments and later recruitment and training costs. Whatever the explanation, however, it is apparent that this element of the assumed market adjustment process, which should have helped employers in the exportable and import-competing goods industries to reduce costs, did not operate quickly enough to alleviate widespread financial difficulties. While transmitting a good part of the enforced reduction of their prices to other sectors, the tradeable goods industries continued to suffer the high costs generated by the protected sectors. 108. Much of the concern regarding exchange rate policy over the past: year focussed on the agricultural sector, which has historically been the major provider of Argentina's foreign exchange earnings, but whose growth was long inhibited by an overvalued exchange rate and other policies intended to shift resources in favor of the urban sector. The evidence collected covers only a small sample of farms and a brief period of time, showing the squeeze on farm profits resulting from reduced earnings (as translated by the exchange rate), while import costs decelerated significantly more slowly, and financial charges rose rapidly. 1/ In this regard, some spillover effect may be attributable to the 20% real wage increase granted government workers in 1980 (which also accounted for most of the increased fiscal deficit in that year). - 48 - 109. Nevertheless, farmers in the Pampas, the heart of Argentine agricul- ture, appeared to be responding favorably to the changed conditions. Although new fixed investment was practically nonexistent, a shift in land use was evident toward more intensive cropping, involving greater use of fertilizers, insecticides and other modern production inputs. Also probably occurring was the more efficient use of machinery and other fixed capital accumulated during previous years of subsidized credit. More serious were the problems observed among the small and medium-sized fruit growers and other farmers outside the Pampas, whose needs for modernizing investment were more immediate. Neverthe- less, some real economies may be achieved by the process of merger and vertical integration that has been set in motion. 110. The impact of the strategy on the industrial sector varied widely depending on the make-up of each sector's inputs and its product markets. In general, industries not threatened by external competition, either because of natural trade barriers or sustained tariff and non-tariff protection, continued to enjoy rapid price increases and were able to do relatively well despite expensive credit and rising labor costs. At the other end of the "spectrum" were the export industries who were first and hardest squeezed by both falling earnings and continuously rising costs. Over the course of 1979-80, an increas- ing number of formerly protected industries were brought into effective compe- tition with imported goods. Also important in determining the differential impact of policies among enterprises was their respective access to, and willingness to accept, lower-cost foreign credit. 111. The manufacturing sector undertook substantial investments in new machinery and equipment in 1979 and 1980, despite the uncertain economic outlook and high interest rates. As expected from the price trends out- lined above, however, the principal investors were in such non-traded and protected goods sectors as automobiles and cement. Substantial investment also occurred in capital goods industries, however, a sector which was rapidly exposed to foreign competition in 1979/80. Further empirical analysis is required to understand the emerging investment pattern. In view of the contin- uing large disparities in effective protection, and increasing volatile expectations regarding the exchange rate, there are reasons to believe that the investment pattern being stimulated may not have conformed with the desired restructuring in accordance with long-term comparative advantage. 112. Contrary to the Government's intention of achieving both lower and more uniform rates of effective protection across sectors in order to reduce resource allocation distortions, it appears that the slow and uneven reduction of trade barriers, in the face of an appreciating real exchange rate, resulted in an even greater disparity among effective protection levels in 1979/80 than had existed before the policy's introduction. 1/ It is also evident that the commercial banking system, after years as a passive agent of the Central Bank, was ill prepared to intermediate efficiently the large flows of credit avail- able, including the massive foreign financial inflows. The large interest 1/ It should be mentioned, however, that the tariff program promised to even out those distortions by 1984. - 49 - rate differential between peso loans and dollar loans worked to the detriment of borrowers lacking access to the latter and does not appear related to the expected returns or relative riskiness of the investments to be financed. (The relative financial burdens borne by peso and dollar borrowers were, of course, dramatically changed by the large devaluations and reacceleration of inflation that occurred in 1981.) Finally, some investment appears to have been motivated by the expectation that policy would soon be reversed i.e., that the peso would be substantially devalued and that the margins of protection previously lost would be restored. 113. The financial sector initially enjoyed high profits from the large spreads which existed between deposit rates and loan rates, on the one hand, and peso rates and dollar rates, on the other. Serious problems of solvency, however, reflecting the growing financial difficulties of borrowers, were becoming evident by early 1980, and the Central Bank was under increasing pressure to prop up the system. The collapse of several major banks precipi- tated a brief crisis in April 1980 and, although quickly overcome, contributed importantly to the growing uncertainties and expectations of a policy change. Between January and September 1980, Central Bank rediscounts to financial institutions rose from a$250 billion to a$1.9 trillion. In addition, the Central Bank assumed some a$9 trillion (nearly US$4.7 billion) of liabilities of the liquidated banks. Remaining Problems and Policy Responses in 1981 114. Few observers have disagreed with stabilization and restructuring objectives of the 1976-80 program, but debate will continue for some time over the reasons for the increasingly serious problems encountered in 1980/81. In any event, the Administration, which took office in March 1981, again faced the need to stabilize prices and the balance of payments, to restore confidence in the government's ability to manage the economy, and to accomplish these objectives in such a way that the gains in economic efficiency, achieved by the reduction of domestic controls and the opening of the economy to interna- tional trade, were not lost. 115. In response to the accelerating capital flight, the Government devalued the peso by 30% in April 1981 (on top of the 10% devaluation in February), 30% on June 2, and another 30% on June 22. The latter devaluation created a dual rate system -- a new floating rate applied to financial trans- actions, while commerce continued to be transacted at a crawling peg. Export taxes were temporarily raised on traditional agricultural products, and tax reimbursements to other exports were reduced in order to dampen somewhat the inflationary impact of the devaluations. 116. Although the large devaluations represented the abandonment of one of the central tools of the previous Administration's economic program, the basic policy principles enunciated by the authorities were consistent with the 1976-80 objectives. The Minister of Economy made clear that the Government was determined to continue the opening of the economy. Thus, at the time of the April devaluation, all external tariffs exceeding 55% were reduced by 12 percentage points, and the maximum tariff on all goods - 50 - then charged between 43 and 55% was reduced to 43%. (To help sagging public revenues, all external tariffs between zero and 43% were raised by 5 percentage points in June 1981.) A Governmental Commission, consisting of representatives of the Ministries of Economy and Finance, Industry and Mining, Agriculture, Trade, and Public Services was formed to evaluate the import tariff and export tax reimbursement systems and to make recommendations for possible changes. The different recommendations of the Ministries of Finance, Trade and Industry could not be reconciled by the President. As a consequence, a decision on tariff policy was delayed as were a number of other economic policy decisions. In the face of growing economic and political uncertainty, the President and his Cabinet were replaced on December 22, 1981. 117. The trade balance and the current account balance improved in 1981 as a consequence of the exchange rate adjustments, an excellent agriculture harvest, and the general slowdown of the economy. While waiting for a fuller definition of the new Administration's program, domestic price pressures will continue as a consequence of the devaluations and the monetary effects of Central Bank efforts to maintain the solvency of the financial system. It is particularly urgent in these circumstances that strong measures be taken to reduce the public sector deficit and that pressures for renewed protection and subsidies be resisted. - 51 - APPENDIX 1 Page 1 REVENUES AND COSTS OF AGRICULTURAL ENTERPRISES IN THE PAMPAS AND THE INTERIOR Revenues, Costs and Profitability in the Pampas 1. Micro-level financial information of the agricultural sector in Argentina is dispersed, and comparative data over time are incomplete. The examples below, though limited in number and time span, provide an introduction to the economic and financial situation of Argentine agricultural enterprises during the 1978-80 period. Table A.1 presents data on revenues, costs, margins and returns to capital pertaining to a large operation with fixed assets on the order of US$29 million in June 1980. The main activities of this corpora- tion, which operates large units in different subregions of the Pampas, are: (a) cattle raising and fattening, (b) soybeans production, and (c) corn and wheat growing. Organization is adequate, and technical levels are high. The financial situation of the firm is solid, but over the three years shown here profits are seen to have deteriorated. 2. Revenues in constant dollars declined from US$4.2 million in 1978 to US$3.2 million in 1979 and 1980. This decline in gross income of nearly 25% in real terms resulted from lower prices and- in some particular cases- poor harvests. 1/ On the other hand, production costs decreased by only 5% between 1978 and 1980 and amortization increased slightly, as the costs of capital goods continued to rise and some re-equipment took place. 3. Interest payments were computed assuming a return to operating capital during six months per year at a rate equal to the average ex-post rate of interest for 30-day loans. This procedure takes care of the opportunity cost of capital (if operating capital was owned by the firm), or it is the actual financial cost in case the firm borrows funds. A large fraction of operating capital in the period under study was loaned on 30-day renewable terms, with interest rates adjusted upon renewal. The average real interest rate for 1978/1979 was negative. Consequently, the firm derived a subsidy if it borrowed funds for operating capital, and the subsidy so derived permitted a modest net profit for 1978/1979. The situation for 1979/1980, however, changed, with real interest rates turning sharply positive in September 1979. Financial costs increased from 3.75% of gross income in 1977/78 to 5.6% of gross income in 1979/80. The modest reductions in production costs were cancelled by the increases in amortization and interest costs. 1/ Output losses were particularly important for corn and sorghum, total 1980 production of which was below harvests of the previous two years by nearly a third A combination of drought and floods in early 1980 devastated large part of the Buenos Aires province. Table A.1: Economic Indicators of a Large Scale Operation in the Pampas, 1978-1980 In constant US dollars Indices (000 US$ of June 1980) - (Gross Income 1978=100) 1978 1979 1980 1978 1979 1980 1. Gross Income 4240 3220 3213 100 76 76 2. Costs 2887 2816 2724 58 66 64 2.1 Variable 1653 1559 1510 39 36 36 2.2 Fixed 1234 1256 1214 29 30 38 3. Amortization 338 376 411 8 9 10 4. Interest (6 months) 159 159 181 4 (4) 4 5. Results 1352 406 480 32 1 12 5.1 Gross Margin (1) - (2) 5.2 Net Income 5.2.1 Interest excluded 1013 31 79 24 1 2 (5.1) - (3) 5.2.2 Interest included 854 190 (102) 20 5 (2) (5.2.1) - (4) M Note: 1978 corresponds to agricultural year 1977/1978, etc. /a Current revenue converted into dollars and deflated by US wholesale price index. F- Imputed interest is only counted for the time credit is required from sowing to harvesting, which takes about 6 months. SOURCE: Mission estimates based on direct information from enterprises. APPENDIX 1 - 53 - Page 3 4. Northern Pampas. The South of Santa Fe and the North of Buenos Aires constitute the most fertile subregion in the Pampas. Traditionally known as the "corn-belt" of Argentina, this area, with usually well drained soils rich in organic matter and minerals, covers an area of about 3-4 million ha. The heart of the area is known as the "golden triangle" formed by Rojas, Pergamino and Salto (see Map 2). This subregion has witnessed the most important changes taking place in Argentine agriculture in recent generations, viz. a rapid expansion in the planting of soybeans, which simultaneously implied the transition from the traditional one-crop-per-year system to double-cropping. The change was made possible by the timely availability of short-cycle varieties of wheat. 5. Table A.2 presents the cost/income situation of a cooperative pro-- ducing corn, wheat and soybeans in the 1979/80 agricultural year. Several aspects are worth comment: (a) Wheat fertilization has become standard practice. Fertilizer and agro-chemicals account for one third of total operating costs in wheat and for 22% in the case of soybeans production. This cost structure reflects a striking departure from traditonal input use in wheat production. Currently fertilizer doses are one hundred kg of urea per ha. at a cost close to US$50/ha. Wheat varieties are short-cycle varieties from Mexican origin developed at INTA in close cooperation with CIMMYT. 1/ Fertilized wheat fields yield on average 0.5 to 0.7 MT of additional grain per ha., that was about US$85-90/ha of extra income in 1979/80. (b) While gross TaTi s on wheat and corn amounted to 15% of sales, soybeans prices in ±979/80 have been too low even to cover operat- ing costs, assuming average soybean yields of the last few years. (c) If financial costs, currently estimated to amount to 50% of operat- ing costs, were included, the gross margin for wheat and corn would be cut by half. With land values being estimated between $a6 and $a8 million per ha, the return to land was less than 1%. 6. Information on two larger farms is summarized in Table A.3. Farm A represents a large operation close to Rojas. Total area is 1,500 ha. One third of the land is in natural and permanent pasture. Corn and soybeans are the two most important crops; some 500 ha of each are planted annually. Up to now most of soybeans on this ranch are grown as a single crop. Wheat is planted on some 300 ha of land. The favorable economic balance in 1977/78 resulted from a combination of good yields and high prices, particularly for corn and soybeans. Profits declined sharply in 1979 and turned into losses in 1980., 1/ INTA - Instituto Nacional de Tecnologia Agropecuaria, Secretariate of Agriculture; CIMMYT - Centro Internacional de Mais y Trigo. Table A.2: Northern Pampas: Costs and Returns of Three Crops, 1980 Wheat Corn Soybeans (000 pesos June 1980) Land preparation, planting and tillage ........ $a 000/ha 110 185 135 Seeds ........................................ $a 000/ha 74 71 66 Fertilizers ................................... $a 000/ha 85 -- -- Agrochemicals (herbicides and insecticides)...... $a 000/ha 45 20 80 Harvesting .................................... $a 000/ha 70 100 80 Total operating cost ...........................$a 000/ha 384 376 361 Land rental .................................... % of yield 30 40 30 Yield .......................................... MT/ha 2.5 4.0 1.8 Net Yield to producer .......................... MT/ha 1.7 2.4 1.3 Net Price ...................................... 000 $a/MT 25.6 18.4 27.2 Gross income .................................. 000 $a/MT 448 442 343 Gross Margin ..................................000 $a/MT 64 66 (76) SOURCE: Cooperativa Agraria de Salto and mission estimates. Z APPENDIX 1 - 55-, Page 5 Although variable costs declined considerably (20% in case A, 40% in case B), the combination of low international prices for soybeans and corn and the slow devaluation led to even more rapid declines in revenues. Average domestic prices for soybeans in 1979/1980 were $a 280/MT at the producer level, compared with $a. 700/MT in 1978 and $a 500/MT in 1979. 1/ Corn prices also declined sharply in real terms from $a 300/MT in 1977/1978 to $a 180/MT in 1979/1980. 7. In order to separate the individual incidence of yields and prices on income generation for the period 1979/1980, gross income on the basis of average land use has been computed considering two sets of yields and prices as shown below: Gross Income Under Different Assumptions (000 U$ of June 1980) Prices 1979/1980 December 1980 Yields 1979/1980 441 634 Average 627 774 NOTE: Average yields in MT/ha are 2 for wheat, 4.8 for corn and 1.6 for soybeans. Yields in 1979/1980 were 2.0, 4.0 and 1.1 respectively. December prices are referred to June pesos dividing by 1.31. All figures converted into U$ dollars at the rate of $al,840 per dollar. The calculations show that the 1979/1980 grain prices were too low even to cover interest and amortization with average yields. On the other hand, if December 1980 prices had prevailed earlier, the two yield alternatives would have been high enough to cover all costs and - in the case of average yields - would have generated a moderate surplus. 8. A close examination of farm B's financial statement confirms the above findings. Low international grain prices in early 1980 combined with an "overvalued" exchange rate determined the negative results, in spite of productivity increases and cost reduction. In this case, total area is 1,600 ha, a large size farm for the region. Double cropping is more intense than in case A, a circumstance that probably explains the better financial results of this firm. Even more interesting is the fact that Farm B must have been able 1/ All in thousands of June 1980 pesos. Given the fact that the real exchange rate appreciated by about 30% between 1978 and 1980, the fall in the dollar price for soya was responsible for roughly 50% of loss in export revenue, whereas in the case of corn, the international price decline accounted for less than 25% of loss in export revenue. Table A.3: Economic Indicators of Two Firms in the Northern Pampas Firm A Firm B 1978 1979 1980 1978 1979 1980 1000Uss june 180) 1. Gross income ................... 1,014 698 441 1,173 870 497 2. Cost .......................... 612 632 538 712 702 527 2.1 Variable ................... 376 343 304 503 461 295 2.2 Fixed ..................... 235 290 233 209 241 232 1 3. Amortization ................... 51 46 48 59 61 70 4. Interest (4 months) ............ 39 (43) 43 46 (48) 43 5. Results 5.1 Gross Margin (1) - (2) ... 403 66 (96) 461 168 (30) 5.2. Net Income ............... 5.2.1 Interest excluded (5.1) - (3) ........ 352 20 (144) 403 106 (98) 5.2.2 Interest included (5.2.1) - (4) ...... 312 63 (186) 357 155 (140) 6. Return to capital (%)......... 4.3 .9 -- 6.0 3.3 -- SOURCE: Mission estimates - 57 - APPENDIX 1 Page 7 to use inputs much more efficiently in order to reduce variable costs twice as rapidly as Farm A. As a consequence of falling revenue and high interest rates, investment in machinery and equipment of these two farms and others has been small in 1979/80. Tractor dealers in that region reported sales below any previous year recorded during the last two decades. On the other hand, sales and auctions of used machinery were booming, and so must have been repair costs. 9. The Wheat Belt. The southeast area of Buenos Aires (Tres Arroyos, Loberia, Necochea, see Map 2) has a long tradition in wheat growing. One of the most progressive farming communities in the country exists in Tres Arroyos, the center of the area. Good soil, adequate moisture and low rainfall variability have contributed to transform this area into the "wheat belt" of Argentina. Nevertheless, mixed farming is the predominant system of production. 10. Income and cost data for a 600 ha farm is presented in Table A.4 Two thirds of the land is pasture (cattle raising and fattening), 70% of which is permanent and the remaining 30% seasonal. Table A.4 WHEAT BELT: COSTS AND REVENUES OF A TYPICAL FARM IN 1980 (000 $a June of 1980/ha) Gross Production Gross Income Costs Margin A. Economic Indicators Crops 390 258 132 Livestock 218 122 96 Total 608 380 228 B. Net Margin 1. Gross margin 228 2. General expenses 100 3. Interest payments 56 4. Net margin 73 SOURCE: Ing. N. Parenti, Ing. N. Orfano, Tres Arroyos. Cropland is divided between wheat (80%) and oats (20%). Wheat yields for this particular case were 2.5 MT/ha (compared with 2.0 MT/ha four years ago). Beef cattle production is 0.2MT liveweight/ha. Both figures are consistent with - 58 - APPENDIX 1 Page 8 the use of advanced techniques of production. General expenses were reported to have increased by 60% during the last three years. While the gross margin was close to U$120/ha, general expenses and financial costs reduced that margin to U$35/ha in 1980 (in this example financial costs are those actually paid by the firm). As in the cases reviewed in the Northern Pampas, there is a discrepancy between the net margin and the value of the land which was reported to average U$1,200/ha. Since the real value of land did not change much, it can be argued that farmers viewed the 1979/80 levels of income, constrained by a low exchange rate and high interest rates, as transitory. 11. The Western Pampas. The north western region of the Pampas is another area where agriculture has undergone substantial changes in the recent past. The area has traditionally specialized in cattle fattening (Map 2). Annual rainfall oscillates between 600 and 800 mm. Well drained soils rela- tively poor in organic matter are typical of the area. They are well suited for alfalfa, an ideal forage for cattle fattening and soil protection. The latter is an important characteristic in an area of sandy soils potentially subject to serious eolic erosion. Ranches in this area frequently average 2,000 and 3,000 ha. Units of 5,000 ha are not exceptional. 12. In the late 1960s a typical pattern of land use was the following: 60% in permanent pasture, 15% in summer forages, 15% in winter forage (rye, wheat) and 10-15% in crops, mainly wheat and, later on, grain sorghum. The current distribution shows only 40% of permanent pasture, 10% of summer forages, 10% of winter forages and 50% in cropb (wheat, corn and sumflower). This substantial change has been made possible by the introduction of improved seeds (either in terms of better yields or plants adapted to the ecological conditions of the area) and better techniques of land preparation which take into account soil conservation practices. Higher profitability of crops relative to livestock provided the necessary impetus for the major change in organizing of production in this area of the Pnmpas. 13. The reduction in pasture has not been followed by a proportional reduction in cattle numbers; the result is a lengthening of the fattening period. Although more kgs. of beef/ha could be produced by a reduction of the herd, resistance of producers indicates current uncertainty in production decisions. By holding a larger herd, ranchers keep a capital good which immediately internalizes the effect of price movements (beef prices in Argentina have displayed a long run upward trend but large short-run varia- tions). On the other hand, because of positive real interest rates, the opportunity costs of holding cattle off the market has increased substantially. 14. The operations of two ranches in that area during the agricultural year July 1, 1979 to June 30, 1980 are summarized in Table A.5. While Firm D represents a large ranch which is now devoting considerable resources to crop production, firm E is closer to a typical operation in terms of land use. Land productivity in both cases is high: 225 kg of beef (liveweight)/ha/year and 4 MT/ha of corn. The two analyzed cases represent situations where modern technology is widely used. Both ranches receive first rate agronomic advice. - 59 APPENDIX 1 Page 9 Table A.5: Economic Indicators for Two Ranches in the Cattle Fattening Area, 1979-1980 ITEM Case D Case E I. Total area (ha) .......................... 5,000 2,001) crops (% of total area) .................. 57 44 pasture (% of total area) ................ 43 56 II. Aggregate economic analysis (U$ of June 1980/ha) 1. Gross income ........................... 250 216 2. Costs ................................. 190 94 2.1 Variable .......................... 120 160 2.2 Fixed, except taxes ................ 70 34 2.3 Taxes ............................. 25 25 3. Amortization ............................ 30 40 4. Interest (10% in 6 months) ............ 19 10 5. Results 5.1 Gross Margin (1) - (2) ........... 60 122 5.2 Net Income 5.2.1 Interest excluded (5.1) - (3) 5 57 5.2.2 Interest included (5.2.1)-(4) (14) 47 6. Return on land (at U$ 1,800/ha) ....... - 2.6 % III .Indicators of main productive activities - (U$ of une 1980) 1. Cattle fatteninI head of cattle/ha ....................... 1.7 1.4 ouput (kg LW/ha) ...................... 225 140 Efficiency (output/stock) .40 .30 gross income per ha .................... 170 115 operational expenses/ha ................ 85 44 farm gate price, steers/kgLW .......... 1.20 1.15 2. Wheat % of total area ....................... 17 15 yield (MT/ha) ......................... 2.2 2.5 gross income/ha ....................... 470 356 operating expenses/ha ................. 147 126 3. Sunflower % of total area ........................ 25 21 yield (MT/ha) ......................... 1.5 1.5 gross income/ha ....................... 225 210 operating expenses/ha ................ 180 142 SOURCE: Private sources and mission estimates. - 60 - APPENDIX 1 Page 10 15. The aggregate figures show a substantial disparity in income and cost levels between the two firms. In the larger operation, (farm D), per ha costs are almost twice as high as in farm E. This is true for fixed as well as for variable costs. In both cases, taxes represent about 10% of gross income. Interest has been charged to all costs (expenses) for a six-month period at an annual rate of 20%. The gross margin is substantially different in the two cases (U$60/ha and U$122/ha). While farm D experienced a net loss despite high levels of land productivity, Farm E realized a 2.6% return on land at current market values. The analysis of individual activities shows that in all cases yields were high except for corn in farm D. But even with the good yields experienced by farm E (exceptionally high for corn), as well as relatively modest costs and average sale prices, net profit has been close to US$100,000 for 1979/1980, a meager economic result for an operation involving 2,000 ha of land in the cattle fattening area. As a consequence, no outlays for investment have been forthcoming. 16. Changes in the income/cost situation for farm E are further explored in Table A.6. Two estimates of income were calculated, taking into account prices at the marketing season in 1979/1980 and December 1980 prices. "Expected" output has been computed by assuming a decrease in corn yields, because they were exceptionally high in 1979/1980, and a moderate increase in beef production/ha. The main source of increased revenues was derived from changes in the sunflower prices. As discussed previously, 1979/80 prices of oilseeds were extremely low; the 1980 increases returned prices close to their historical averages. Given the relative importance of sunflower oil, the aggregate change in income is estimated to be 63%. When changes in tax laws (July 1980) affecting marketing costs are taken into account, the result- ing change in income is of the order of 70%. Cost increases are harder to estimate: a crude procedure would be to look at the evolution of the wholesale price index for non-agricultural goods in the period analized (65% increase between December 1979 and December 1980). This comparison shows that costs and income must have moved in approximately the same magnitude and gives an idea of profitability for 1980/1981. The conclusion is that, in spite of substantial increases in sunflower prices, results for 1980/1981 year were expected to be only marginally better than the ones described for 1979/1980. Development of Major Inputs 17. Fertilizers. Fertilizer use in Argentina has been historically concentrated in the sugar cane, vegetable and fruit growing areas. As a consequence of high protection granted to local production, fertilizer was an expensive input, inhibiting its use in grain production. That situation has changed in the last three to four years as a consequence of: (a) the avail- ability of wheat and corn varieties more responsive to increased levels of soil nutrients, and (b) a decline in protection, which has lowered the domestic price of fertilizer. As a consequence, demand for ammonium diphosphate (18-46-0), a fertilizer particularly suited for the "wheat belt" in the South- east of Buenos Aires, has risen substantially. The use of 18-46-0 at a rate of 80-100 kg/ha in this area is becoming standard practice. Fertilized wheat Table A.6: Hypothetical Income Changes for a Medium Size Operation in December 1979 Activity % of area Area Yield Output Prices Gross Income ha MT/ha MT 1979/80 Dec 1980 1979/80 Dec 1980 Change (1) (2) in % (000 $a/MT) (million $a) Cattle - Fattening 48 960 .18 170 1,600 2,100 272 357 + 31 Wheat ... 15 300 2.00 600 255 382 44 65 + 48 Corn .... 15 300 3.00 900 240 340 216 306 + 42 Sunflower 21 420 1.50 630 240 680 176 428 + 43 708 1,156 + 63 NOTE: Prices reported for 1979/80 are average prices for the marketing season: October/December for cattle, Dec/Jan for wheat and March/April for sunflower and conr. Changes in tax laws announced in July 1979 have reduced marketing costs. Consequently grain and beef income should adjusted upward in 5 % and 3% respectively, yielding $a 51 million of additional income. SOURCE: Mission estimates. - 62 - APPENDIX 1 Page 12 fields, producing 600-800 kgs/ha of additional grain have increased ten times between 1977 and 1981. The fertilized fields now make up 15% of the total wheat area. 18. All ammonium diphospate used in Argentina is imported. Import tariffs have been cut from 65% in 1977 to 20% in 1980. As the figures in Table 11 have shown, however, even though the ratio of fertilizer to wheat prices has been declining through time, it is still more than twice as high as in the USA. In addition to tariff protection and overseas transport costs, the price difference is caused by: (a) the small size of the fertilizer market which does not allow for economies of scale in distribution, and (b) higher transportation costs within Argentina. Finally, it should be noted that Table 11 compares relative prices in each country. After the "under- pricing" of wheat has been taking into account, the price ratio difference decreases to about 30% in 1980. Table 11 shows also the asymmetric effects of the exchange rate policy. While the full impact of the devaluation policy was immediately felt in the product markets, there was a lag until factor markets of imported goods like 18-46-0 adjusted to the new economic conditions. 19. The yield improvements possible from fertilizer application are well known. It is reasonable to assume a net addition of about one million ha of land to the wheat area already fertilized, if relative prices declined to a level of 1.5. Under these conditions, the additional production of wheat could be of the order of 700 thousand MT/year, or about 10% of current national production. In the northern Pampas nitrogen fertilization is expanding, and some 18-46-0 is beginning to be used as a result of the intensification in land use achieved through double cropping (wheat/soybeans). A substantial increase is also expected in the demand for urea. It is estimated that about 20 thousand MT/year could be sold in the next two or three years mainly to wheat farmers. 20. Tractors. The stock of tractors in Argentina increased steadily between the late 1950s - when local plant subsidiaries of multinational firms started domestic production - and 1977/78. Although exact figures are not available, because the last agricultural census was taken in 1969, estimates of tractor use in Argentina suggest that the 1977 stock was about twice the 1960 stock. YEAR 1960 1969 1977 Tractors (in 000 units) 11.10 17.73 21.19 Power (in million HP) 4.9 8.6 13.0 Average power (HP/tractor) 44.0 48.5 58.6 Total area planted (million ha) 28.1 28.6 29.2 Power per unit of land (HP/ha) .17 .30 .45 SOURCE: Adapted from E. Corrandini - 63 - APPENDIX. 1 Page 13 Power per unit of cultivated land in Argentina in 1977 was comparable to figures for Australia, slightly above the coefficient for Brazil (.40), about one half the value for Canada (.95) and one third the ratio for the USA (1.30). Although these single factor ratios do not represent adequately factor proportions, they suggest that Argentine agriculture does not seem to be oversupplied in power terms. 21. Annual tractor sales grew by over 50% between 1971 and 1976/77, but, after reaching a peak of almost 22,000 units in 1977, sales declined sharply in 1978. Sales in 1979 and 1980 decreased even more, averaging less than a third of 1977 sales. Estimates based on average tractor life suggest that in order to maintain and renew the stock at the 1977 level, annual sales of tractors should be on the order of 13,000 units. Although this has to be adjusted with the average power of the units considered, it is clear that after 1978 annual purchases of tractors have been substantially below the replacement requirement, implying a net decrease in the stock of power in the agricultural sector of Argentina. 22. The financial reform of 1977 discontinued the subsidized credit scheme under which most of the tractors had been sold in Argentina. At the same time, tractor prices in real terms have hardly changed, in spite of the opening up of the economy which admitted imported tractors for the first time. Some reallocation of tractors within the agricultural sector has probably occurred, given the increasing opportunity costs of keeping tractors idle or underutilized, but this reallocation cannot go on for a long period of time. A relatively high capital stock in the mid 1970s, declining profitability in agriculture, producers' reluctance to accept current conditions for long-run credit, and high tractor prices explain the drastic decline in tractor sales for the last three years. While perhaps consistent with increased efficiency of factor use in the short term, the persistence of this situation would be incompatible with the long-run growth of agriculture. Prices and Costs for Regional Products 23. The Cotton Economy. The price-cost relationship has also deterior- ated for a number of products grown in the interior. But whereas farmers in the resource rich area have still substantial potential to use land and other inputs more efficiently, the possibility for improved allocation of resources are more limited and more expensive in the poorer regions. In the case of cotton, most of the farmers have suffered substantial income losses during the recent past. As shown by the data below, revenues per ha of cotton have declined by over 60% in the last two years: Producer Year Price Yield Income 1970 $a/ha Index 1971/1978 628 .95 597 100 1978/1979 350 .85 298 50 1979/1980 278 .82 227 .38 NOTE: Prices in 1970 $a/MT of raw cotton, yields in MT/ha. - 64- APPENDIX I Page 14 Both yields and prices fell, but whereas the yield decline amounted to 14%, prices have fallen by 56% below the 1971/78 average. A comparison with producer prices in the USA and other major cotton producing countries shows that international cotton prices have remained rather constant in real terms, suggesting that the main reason for the extremely low level of cotton prices in Argentina is exchange rate policy. As it could be expected, domestic prices of cotton fiber have followed closely the price of raw cotton; 1980 prices are also over 45% below the 1971/78 average. 24. The relative costs of inputs, measured against 1 ton of raw cotton, increased dramatically. As Table A.7 indicates, the opening of the economy was less stringent on the import than on the export side. Relative prices of tractor and fuels with relation to cotton doubled between 1976 and 1980, and the import prices of insecticides and herbicides rose by 50% vis-a-vis cotton prices. Most remarkable is the constant relative increase of labor costs, which rose to levels close to the 1970/74 period, a time when real wages were pushed upward by powerful labor unions. Table A.7 COTTON: RELATIVE PRICE OF INPUTS (Metric tons of cotton) Year Labor Insecticide Herbicide Fuel Tractor (1) (2) (2) (2) (3) 1970/1974 .40 n.a. n.a. .29 23 1976 .13 25 n.a. .40 30 1977 .13 12 19 .20 17 1978 .19 15 26 .66 43 1979 .19 14 18 .59 45 1980 .34 18 27 .80 65 SOURCE: SEAG, Servicio de Economia Rural. Note: MT of raw cotton necessary to pay for: (1) labor required to harvest one metric ton of cotton, (2) 1,000 lts, and (3) one tractor of 42 HP. 25. Labor costs still play an important part in the cotton economy, and it is therefore no surprise that cotton farmers have suffered losses in 1980, despite government support in the forms of credit at more lenient terms and fiscal subsidies for exports. The following revenue and cost calculations are based on a typical medium-sized Chaco cotton farm, which - 65 - APPENDIX 1 Page 15 produces 40 MT of cotton on about 50 ha. 1/ December 1980 cotton fiber prices, free alongside ship Buenos Aires, were US$0.74/pound. Considering a rate of exchange of $a 2,000/U$ dollar and an export subsidy of 10%, the price of one metric ton of cotton fiber FAS Buenos Aires was about $a. 3,588,000. Port expenses and transportation costs from Resistencia to Buenos Aires added up to $a 198,000/MT. Consequently, the price of one MT of cotton fiber at Chaco amounted to $a 3,390,000. Since one MT of raw cotton yields approxi- mately 330 kg of fiber, the resulting price of one MT of raw cotton at the ginning plant was $a. 1,118,700. Adjusting for ginning costs and the value of cotton seed ($a 200,000/Mt and $a 117,000 respectively), the final price to the cotton producer was about $a 1,036,700/MT. 26. As the cost data below show, there was a potential loss of about $a 100 thousand, even before depreciation and interest on fixed assets were charged, and the farmer's own labor was remunerated. ITEM $a/ha Percentage of total Seeds (50 kg/ha) 42,500 4 Weed control (herbicide) 35,000 5 Pest control (4 sprays) 17,000 Gas oil (151 Its at $a 680/1t) 102,600 9 General expenses 190,000 17 Labor: tillage (carpida) 46,000 4 harvest 490,000 44 other labor 80,000 8 Interest on working capital (50% at 20/ int. rate annual) 103,310 9 TOTAL 1,136,410 100 Adding the 1980 losses to the already high indebtedness of many medium-sized farmers in the northeastern economy, makes the size of the regional economic and social problem clear. 27. A survey done by the Government of Chaco in December 1979 showed that the outstanding debt of Chaco farmers was roughly equivalent to the value of one cotton crop. Forty percent of the farmers were owing between U$60 and U$240/ha of land. As a consequence, Banco de la Nacion and Banco Chaco, set up a special program (PRACKACO), unifying the debts of those farmers who owned less than 300 ha and whose debts exceeded a$ 200,000/ha at the time of the survey. The program has a flexible repayment schedule. The farmer is required to pay at least 5% annually of the value of a hypothetical production per ha (40% cotton, 25% grain sorghum, 25% sunflower and 10% 1/ More than one half of total area planted with cotton occurs in holdings between 20 and 100 ha. These farms are fully "commercial" in the sense that they use institutional credit, hire labor and demand technical inputs. - 66 - APPENDIX 1 Page 16 beefcattle), computed at current prices and yields. One third of the eligible producers (4,800 out of 14,500) have applied to participate in this special regime. For the 1980/81 season, a large fraction of the area planted to cotton was financed by the Banco Chaco under a special loan, covering the cost of seeds and gasoil at one half the rate of interest charged by Banco Chaco in current operations. 28. Financial relief programs like PACHACO are doomed to fail, however, if the economic conditions determining the profitability of cotton production remain unchanged. First and foremost, new ways must be found to increase efficiency and reduce costs of operations. Mechanical harvesting is the most promising cost-reducing technique in the cotton economy. In order to reduce labor costs, the individual producer must have access to the machine when it is needed. A carefully designed program to promote the adoption of the mechanical harvester would be a most appropriate project for the area. Farmers recognize the usefulness and the economic advantage of the cotton harvester. However, they do not have the resources to buy the machine and are reluctant to borrow on US dollar terms. Prices in 1980 were U$110,000 per unit, which is twice the price of an equivalent machine in the USA. Secondly, research is needed to develop a winter crop to permit double-cropping and reduce land left fallow. 29. Fruit production and exports. The economic and financial problems encountered in the cotton fields of the Northeast are not unique. Data on revenue and costs in the Southwestern fruit growinag section of the country show similar characteristics. Table A.8 compares farm gate prices in Argentina and in the USA and FOB prices for Argentine apples. Producer prices reached a maximum in 1973 as a consequence of a drastic fall in supply. Rapidly increasing inflation and an oversupplied market explain the general decline in prices in 1975 and 1976 in Argentina. US prices fell even more during that period. After a recovery in 1977/78 Argentine prices at the producer level declined drastically in 1979/80, while USA prices for fresh apples stayed close to historical averages. Similar to price developments in the US, FOB prices for fresh fruits also stayed close to historical averages in the last three years. The recent fall in apple prices at the producer level is, therefore, not the consequence of lack of foreign demand or low international prices, but, to a large extent, the direct consequence of domestic policy. - 67 - APPENDIX 1 Page 17 30. Some indicators of the purchasing power of apple producers at the beginning and at the end of the 1970s are given below: RELATIVE PRICES FOR APPLE INPUTS 1971-1980 (Metric tons of apples) Item Period % Change 1971/1973 1979/1980 (2):(1) Ammonium sulphate 254 305 20 Ammonium di phosphate 483 786 63 Tractor driver 492 404 (18) Tractor 68 HP 34,330 48,200 40 Gas-oil 299 436 46 SOURCE: SEAG, Servicio de Economia Rural. Prices are in MT of apples at the wholesale Buenos Aires market per MT for both fertilizers, monthly wage for the tractor driver, one tractor and 1,000 Its of gasoil. With the exception of wages, the relative prices of all other items have increased substantially in terms of fruit. Productivity in apple production did not change enough to match increases in input prices. These figures above refer to "instant" prices and do not take into account the effects of financing, i.e. the credit subsidy which was important in financing tractor purchases. 31. The incidence of labor costs in the production of apples is high, as shown in the following figures adapted from a recent study: MAJOR COSTS IN APPLE PRODUCTION 1979/81 Item Cost in US$/ha Share (%) Labor 5,332 44 General Expenses 1,709 15 Specific Expenses 1,605 13 Amortization 1,478 12 Marketing Expenses 1,014 8 Interest (50% of all expenses at 20%/year) 1,004 8 SOURCE: Adapted from Boletin 59, EFFA (Empacadores de Frutas y Frigorificos Asociados, Rio Negro). Prices correspond to August 1980. All estimates are based on a 15 ha orchard yielding 31 MT apples/ha. Labor for harvesting is by far the largest cost component. "Specific expenses" are essentially fixed costs (fertilizers, insect and pest control, cultivation). Marketing expenses include a sales tax, which is paid when - 68 - APPENDIX 1 Page 18 Table A.8: Indices of Apple Prices (1970=100) Argentina: USA Argentina YEAR (farm fate) (farm gate) FOB (1) (2 (3) 1970 100 100 100 1971 125 104 94 1972 116 127 89 1973 268 135 199 1974 64 117 95 1975 40 85 132 1976 37 81 109 1977 76 120 107 1978 87 112 117 1979 43 101 111 1980 (*) 37 106 105 NOTE: The index in column (1) represents farm gate prices deflated by the WPI for non agricultural goods, and converted into an index: 1970=100 Sources for column (2) are agricultural prices, USDA, several issues and the WPI, Dept. of Commerce. The index in column (3) was obtained by dividing the average FOB price per ton of fresh exported apples into the WPI to express export prices in constant US dollars. Index 100 stands for $a 219/MT, in 1979 pesos in column (1), U$ 10.3 c/pound in 1975 dollars in column (2) and U$ 304/MT of fresh fruits - in 1975 dollars in column (3). Reference: (*) preliminary. SOURCE: INDEC, and SEAG, Ministry of Economy Banco Ganadera Argentino US Department of Agriculture and Commerce - 69 - APPENDIX 1 Page 19 output is marketed. If the above figures - which do not include rent and interest on fixed capital - are expressed in December prices and converted into US dollars, the cost per kg of apple at the farm gate, assuming different yields, would be: AVERAGE APPLE PRODUCTION COSTS ASSUMING DIFFERENT YIELDS Yield Cost in Cost in (000 kg/ha) $a/kg US$/kg 25 551 .28 30 459 .23 35 393 .20 32. The figures shown above should be taken more as general indicators than as accurate estimates, since there are several ways of computing produc- tion costs, and there is always room to argue about the inclusion of a given item or the use of a certain input. Experts consider an average yield of 31 MT of fresh fruit/ha, consistent with the agronomic practices followed in the hypothetical orchard for which the costs of production were estimated. 33. Apple prices at the farm gate - and consequently profitability and long run growth - largely depend on foreign demand for fresh fruit and on the costs of packing and marketing. Indicative figures from EFFA and PAISA (Productores Agro Industriales, Sociedad Anonima), two large exporters of fresh fruit, are given below: Average Costs of Packing and Marketing Fresh Apples (US$/tray-pack, December 1980) US$/box Packing Materials (box, trays, paper, etc.) 3.35 Labor 1.60 General expenses .50 Amortization .32 Interest (50% of expenses at 20%/year .54 Total 6.30 Minus tax rebate (VAT) . 20 Total, net cost/box 6.10 Marketing Freight to port General expenses .85 Cold storage 1.20 Interest (50% of expenses at 20%/year in 4 months) .09 Total 2.89 Marketing and Packing 8.99 SOURCE: Adapted from EFFA (boletin 59) and PAISA. - 70 - APPENDIX 1 Page 20 In December 1980 the cost of packing and marketing one box of apples was nearly US$9.00. FOB prices for Argentine apples (Buenos Aires or Bahia Blanca ports) were close to the packing and marketing costs. The Government enacted a 10% export subsidy in 1980, so there was approximately U$1.00/box left over to pay for the fruit. With boxes containing 10 kg of apples, the per kg price at the farm gate is expected by apple growers to be between USJ8 and US410 in 1981. As shown above, these prices are insufficient to provide an economic return to the factors of production engaged even in the most productive apple orchards in Rio Negro. As a consequence of the weak financial position of fruit growers, investment in agricultural machinery and equipment has fallen off dramatically and several dealers have gone out of business permanently. 34. Recognizing the increasing problems in the fruit producing regions in 1980, the authorities designed a set of measures which significantly departed from the main philosophy of their economic policy. These measures included: (a) a 10% subsidy on the export of fresh fruit and concentrated juices; (b) a special credit line from provincial banks offering loans at interest rates which were 50% below market rates, and (c) a postponement of the 1980 land tax. These measures helped to avoid a worsening of the situation in early 1981. Producers asked for a 35% export subsidy for the 1981 crops, but that proposal was rejected by the Government. In January, the authorities announced a more comprehensive program for the whole Patagonia area. The new package attempts to lower costs through reduction in taxes and social security payments, stimulate exports by granting long-term dollar loans with zero interest to both apple and peach producers, and to foster improvement in quality and efficiency by ordering INTA to engage in a large-scale technical support program. 35. In addition to these efforts to improve the supply side, it is recognized that new markets will have to be found, especially since there has been a reduction of demand from Argentina's largest customer, Brazil. Per capita consumption of apples in Argentina is low. Estimates differ, but apparent consumption is on the order of only 10 kg/person/year, a small amount when compared to levels of consumption in the USA, Germany, and Scandinavia. There is room, consequently, to expand domestic consumption. Improvements in roads and truck transportation would provide part of the necessary infrastruc- ture. Cold storage is still insufficient. All sources agree that the domestic market for apples is promising and unexplored. 36. The apple juice industry, which developed rapidly in the 1970s, should be regarded as a complement to the fresh fruit industry, allowing full utilization of all fruits. The market for apple juice has been very firm until recently. In February 1979 the CIF price (USA) was US$6.95/gallon. Increases in dollar prices compensated for the effects of the exchange rate lag. In 1980, however, prices declined to US$4.80/gallon (plus a 10% export subsidy), a value which barely covered operating costs and interest on borrowed capital to build the plants. There was almost no surplus to pay the fruit growers, i.e. the price of fruit to be processed was given zero value, which would not seem a viable long-run situation even with most apples supplied for juice not being fit for export, since picking and transport to crushers had still to be reimbursed. - 71 - APPENDIX 2 Page 1 ADJUSTMENT PROCESSES OF SELECTED FIRMS IN THREE MAJOR INDUSTRIAL SUBSECTORS 1. The 1979/80 policy package in general and the tariff reform in par- ticular were intended to affect industrial subsectors in a non-discriminatory fashion. However, differential tariff protection, different degrees of natural protection and different access to credit produced different impacts. In order to gain a more detailed insight into the adjustment process of particular industrial branches, representatives of 18 firms, belonging to three major industrial subsectors (textiles and clothing, machinery, and construction material), were interviewed (for a summary description of size, changes in sales and employment, imports and exports awell as financing, see Tables 3.14 to 3.16). Response of Producers in the Textile and Garment Industries 2. Information at the sectoral and firm levels indicates that, on the whole, the textile sector (spinning and weaving) has experienced diffi- culties in competing with cheaper, imported products. Official statistics on yarn production show a sharp decrease in employment and volume of production in this sector between the second quarters of 1979 and 1980 (see Table A.9). Production of celulosic and non-celulosic yarn decreased by 61 and 47 percent in this period, and employment (blue collar) fell by 47 and 19 percent, respectively. Despite the critical situation of the sector, however, some firms were doing better than others, either because they found a niche in the market, or because their operations were highly integrated, including branches less affected by competition, such as high-quality garments. 3. The situation of many producers in the sector was exemplified by a firm whose sales dropped 80 percent in 1979, because its high-quality shirt cotton was much more expensive than the imported material, and because its clients (shirt producers) were also in difficulty from import competition. This firm was responding to competition (internal and external) by increasing mechanization (i.e. buying newer equipment and reducing employment), and by changing production lines towards more specialized products. Although there followed a substantial increase in labor productivity, 1/ it was not clear that the effort would have resulted in sustained increases in profitability. The increase in mechanization has meant not only a reduction in employment, but also a change in the composition of employment towards higher-skilled workers. Thus, despite substantial lay-offs, all the textile firms visited complained about high wages and difficulties in hiring. According to the firms, the shortage and high wages of skilled and semi-skilled workers was linked to high wages paid by the public sector and the car industry. 1/ The data on yarn production also shows important increases in labor productivity between 1977 and the second quarter of 1979. Productivity in 1980 was affected by reductions in production. - 72 - APPENDIX 2 Page 2 Table A.9: Performance: Index for Group of Selected Sectors Synthetic Yarn Paints Plastic Sewing Machines Years Celulosic Non-Celulosic Construction Other Shoes Cement Home Industry Volume of Production 1977 100 100 100 100 100 100 100 100 1978 72 91 91 88 45 104 83 20 1979 I factor 87 119 85 49 44 109 97 16 II 109 127 95 59 61 101 101 29 III 113 146 81 53 73 111 133 4 IV 52 123 85 42 43 115 96 9 1980 I 21 52 69 26 35 110 49 1 II 48 80 73 36 70 103 65 2 III - - 73 41 - - - - Employment (Blue Collar) 1977 100 100 100 100 100 100 1978 85 94 99 13 104 93 1979 1 82 83 104 16 100 98 II 83 83 105 18 102 104 III 83 84 106 19 99 104 IV 77 91 103 14 99 87 1980 I 47 71 105 13 97 75 II 36 65 107 16 94 75 III - - 106 - - - Labor Productivity 1977 100 100 100 100 100 100 1978 86 102 88 435 99 85 1979 I 109 143 57 360 104 94 II 133 152 65 371 97 94 III 140 175 57 319 108 124 IV 69 156 53 399 111 100 1980 I 45 72 37 342 109 60 11 136 118 66 585 104 84 III - - 48 - - - Unit Price (adjusted by wholesale price index) 1977 100 100 100 100 100 100 100 100 1978 112 85 121 129 160 115 107 165 1979 July 84 77 71 142 181 108 87 107 1980 January 122 85 134 254 84 123 102 76 1980 April 69 77 126 212 171 115 110 82 1980 June 68 69 126 254 118 - - - SOURCE: Ministry of Economy, INDEC - 73 - APPENDIX 2 Page 3 4. The vulnerability of the garment sector to foreign competition was greater in the case of standardized items for mass consumption than in the case of quality products for high-income customers. The clothing firms felt the impact of cheaper imports but were able to reorient production towards high-quality items protected by the particularities of the Argentinian fashion. However, even in this section of the market, demand contracted, obliging firms to compete by cutting prices (i.e. raising them less rapidly than the wholesale index) and giving longer credit terms to the retail outlets. To reduce costs, firms were using more imported inputs (threads, materials) and had replaced some of their equipment. 1/ However, mechanization in high-quality garments and shoes remained limited because of the trade-off between mechanization and quality. In the garment firms which were not textile producers themselves, the use of imported high-quality materials was limited, because the price differences were often not large enough to offset the risks of delays in delivery and of losing suppliers in case of policy changes. 5. All except one of the firms in the textile and garments group reduced their work force substantially. This reduction increased working capital needs in the short run because of the need to finance high severance payments. With high real interest rates during most of 1980 and early 1981, financial costs in the more seriously affected firms were about one third of sales. 6. Leather shoe producers, an industry with a large number of small firms in Argentina, faced less competition from abroad than did sport and plastic shoes which could be acquired much cheaper from Taiwan. 2/ Similar to high quality garments, leather shoes produced in Argentina respond better to local fashions and quality standards than imported ones. In addition, firms used local materials that were still relatively cheap. Nevertheless, the shoe firm visited by the mission was recovering from a setback that had lowered its sales to 25% of its previous level. This cutback was blamed by the owners on demand contraction rather than on import competition, an asser- tion not borne out by total sales statistics of the shoe industry, which experienced gains of over 20% in both 1979 and 1980. 7. Firms in the garment and shoe industries responded to the supply- and-demand-induced problems by providing longer credit terms to their clients, which, in turn, made them more dependent on expensive short-term bank loans for working capital. Only vertically integrated firms, with direct sales outlets to the public, were able to operate with lower financial costs. The credits to which these integrated firms had access were, in good part, suppliers' credits in dollars, which were at lower interest rates and at longer terms than the loans obtained from local banks. 1/ The dramatic drop in local production of industrial sewing machines (Table A-9) illustrates the substitution of equipment in the garment and shoe sectors. 2/ Table A-9 shows that the production of plastic shoes in Argentina was recovering after a sharp drop in the first quarter of 1980 to only one third of its 1977 level. Reduction of output did not prevent substantial increases in labor productivity (see Table A-9). APPENDIX 2 Page 4 Equipment and Components Producers 8. Producers of equipment and components were strongly affected by imports and were surviving by means of one or a combination of three strate- gies. The larger and financially stronger firms diverted production away from standardized products and reconverted their factories to produce large equip- ment for major public works (hydroelectric, atomic plants). Smaller firms became importers of the equipment they used to produce and suppliers of services (repair). Finally, a small number of the most technically advanced firms become suppliers to the still highly protected car industry. 9. One of the largest producers of special-purpose machines in Argentina, with the help of its Italian parent, completed the reconversion of its plant in late 1980 to produce large equipment for government energy projects. Two smaller firms were trying to follow the other strategies noted. One was a producer of oleohydraulic components for tractors and combines. The market for this firm practically disappeared because of the lack of demand from agriculture. As a consequence, this firm reduced production by more than 70% and survived by doing repair work and producing components for the air force. In late 1980 it tried to become a supplier of transmission boxes to one of the large car producers. For the reconversion, that firm obtained favorable credit terms from a provincial bank (an annual real interest rate of 1% for a 5-year period). These were extraordinary credit conditions for a reconversion that did not involve a large investment in equipment. 1/ 10. Another component producer, trying to burvive by linking it to the protected car industry, was a producer of chains, whose sales had dropped to 30% of their 1977 level. This firm was the only one left of three chain producers in the country. Modernization plans for one million dollars were discarded, because even the use of new equipment could not reduce cost levels sufficiently to compete with imported chains. 2/ The firm survived by importing most chains and by producing only large chains for oil wells which were more difficult to import. Management claimed that unless it succeeded in getting a contract from the car industry, bankruptcy would be imminent. 11. Component producers working for the car industry, such as a firm which produced glass windshields and windows, generally fared better. As glass products are delicate to transport, foreign competition entered only from bordering countries (Chile and Uruguay). According to this firm, compe- tition among car parts' producers (including glass) was strong, benefitting the car industry, which linked the prices it paid to suppliers to the devalu- ation schedule, thus forcing suppliers to absorb the domestic cost increases. 1/ Long-term loans at low but positive real interest rate became more common in 1980, when banks pooled resources to rescue companies with growth and profit potential. 2/ In mid-1980 a bicycle chain imported from Japan sold for 2,000 pesos in Argentina, while only the metal involved in its production cost 1,800 pesos. - 7- APPENDIX 2 Page 5 While the profit/sales ratio of suppliers was reduced, one advantage of the link with automobile manufacturing was to program production, to reduce stocks and credits to a minimum, and, as a consequence, to realize savings in working capital. 12. To work for the car industry, however, did not guarantee success. A motor producer (with French license) faced substantial problems, since its main client, a government-owned producer of a popular pick-up van used in agriculture, was closed down in 1979. Sales fell from 1,500 motors monthly to only 500, and the firm accumulated substantial short-term debt and laid off two thirds of its workers. In late 1980 it negotiated additional loans to survive, hoping that government policy would revert towards a more protec- tionistic attitude. This hope led many uncompetitive firms to stay in the market. 13. Although prospects for government-related investments were good, given important plans in electricity generation and distribution, work for large-scale public projects was not a passport to easy success either. One producer of large electrical transformers was experiencing strong foreign competition in potency transformers, although much less in distribution transformers. This firm also suffered from a large reduction in demand, which obliged it to reduce production by 70% in 1979-80. The drop in demand fueled a strong price competition among local producers (there were 4 other producers), among them a government-owned firm less concerned with costs. One aspect of this competition was the improvement in credit terms given to clients, putting a strong financial burden on the firm that was previously accustomed to self-financing. Construction Materials and Paints 14. Building materials and, to some extent, paints are products that enjoy natural protection due to high transport costs per unit of value added, although some materials are imported from neighboring countries (Brazil, Uruguay) to be used in construction sites near the border. In this group, all visited firms showed stable or increasing sales volumes and profit-sales ratios. It is evident that, despite some recent signals of slackening demand in the housing market, output and production were at an all-time high in 1979/1980, at least in Buenos Aires. (In most provinces, according to some of the firms, demand for construction materials was contracting, obliging some firms to transport their products all the way to Buenos Aires.) 15. The effect of public works in the demand for bricks and cement is important. Both types of producers experienced a strong recovery in 1979 as a result of the reactivation of public works. Despite the surge in demand, however, firms were worried about the future (changes in the funding of the Government Housing Fund - FONAVI) and had not undertaken any major investment since 1978. All their borrowing was in pesos to cover working capital needs. One interesting aspect of such branches as brick production was the large number of small producers which were able to escape taxes and social security - 76 - APPENDIX 2 Page 6 payments. In periods of recession these small firms lower prices and extend longer credit terms to their clients, forcing larger firms to do the same. According to medium-sized producers visited, small firms have been successful in inducing lower production costs in the construction industry. 1/ 16. Ceramic floors have less natural protection than bricks, because import competition is near (Brazil) or has traditionally taken a large share of the market (Italy). That fact forced Argentinian producers to keep up-to- date production techniques. One interviewed firm had acquired a new over from Italy which helped to increase production from 55,000 m2 to 120,000 m2 monthly with only a small increase in the number of workers (the firm has 150 workers). This firm produced at prices that were competitive with Brazilian imports sold in Buenos Aires. However, two other Argentinian firms had either closed or considered stopping production. 17. The cement producers, like the brick producers, profited from the demand generated by public works (25% of its sales go to the government). Several firms inaugurated new plants. Other cement producers were expanding facilities. That expansion in production facilities followed the removal of price controls and is likely to generate excess supply unless all large-scale public works are executed in time. 18. A leading firm in the building materials sector produced prefabri- cated structures (cement and steel). This firm did not face external compe- tition, but domestic competition remained strong, coming from producers of metallic structures (which are cheaper) and from new firms that have appeared in the last four years. To face this growing internal competition the firm rationalized production, decreasing employment by 35 percent while maintaining the same level of production and standardizing products to reduce production time. As a result, costs weve reduced by 15 percent, allowing the firm to increase prices by less than the increase in the wholesale price index. Sales to public work projects accounted for between 20 to 25% of total sales; the rest was sold to the private sector, mostly for industrial construction rather than housing. Most of the recent investment in expansion and rationalization of production has been financed with short-term credits or has been self- financed. It was particularly difficult for that firm to get long-term financing, because very little of the new investment was in equipment (only 5%) that could be financed with supplier's credits. 19. The industry figures on paint production showed a decrease in volume between 1978 and the first three quarters of 1980 of about 30% in paints for housing and 50% to 60% in paints for industrial use. It was difficult to ascertain the extent to which this reduction was the result of increasing competition from imports or reflected a reduction of internal demand. It 1/ As shown below, lower costs were not translated into smaller price increases by contractors in the last two years. Strong demand and weak competitive pressure allowed the firms to charge higher than average prices. - 77 - APPENDIX 2 Page 7 seemed that the most important factor was demand reduction, because paints generally enjoy some degree of natural protection from imports. Synthetic paints use oil-derived solvents, which in Argentina are relatively cheap, while water-based paints have high transport costs in relation to their value. Industrial paints are usually developed according to the clients' needs and involve some technical services which can be supplied better by local firms. However, paint producers were affected by the opening of the economy to the extent that more imported products arrived already painted. 20. The market for paints in Argentina is highly concentrated, with three out of about 100 firms accounting for nearly two thirds of total sales. The largest firm leads in the production of industrial paints, in which tech- nical services associated to sales are very important. One of the methods used by this firm to compete with imported products was to rent the expensive equipment needed to apply the paint to its clients. The same firm has now come out with an acrylic latex which is similar but cheaper than the one produced by the number two firm in the market. In the meantime, the smallest of the three leading paint producers tried to compete with the two larger ones but finally sold its equity to a Dutch group. With financial and technical help from the parent company, the firm is now introducing new types of paints for the car industry. 21. As with other sectors, paint producers had to increase the credit terms given to clients as a result of slow demand (80-day credits to clients against 55-day of credits from suppliers). The result has been an increase in working capital borrowings and high financial costs. This situation led some of the small firms to bankruptcy. Other small paint producers visited by the mission were doing relatively well because of specialization for special customers (e.g. paint for the Argentinian merchant marine fleet). However, high financial costs prevented them from embarking on important modernization schemes. - 78 - STATISTICAL APPENDIX TABLE OF CONTENTS 1. GENERAL MACRO ECONOMIC INDICATORS 1.1 Real Effective Exchange Rate for Major Imports and Exports, 1969-1980 1.2 Nominal Monthly Rates of Interest, Inflation and Devaluation, 1977-1981 1.3 Change in Price Differentials Between Foreign and Domestically Produced Industrial Goods, 1977-1979 1.4 Relative Prices in Argentina and World Markets 2. AGRICULTURE 2.1 Production and Productivity in Corn, 1970-1980 2.2 Production and Productivity in Sunflower, 1970-1980 2.3 Production and Productivity in Wheat, 1970-1980 2.4 Production and Productivity in Grain Sorghum, 1970-1980 2.5 Production and Productivity in Soybeans, 1970-1980 2.6 Grain Production and Productivity, 1970-1980 2.7 Main Grain Exports, 1970-1980 2.8 Beefcattle Slaughter, Exports and Domestic Consumption, 1978-1980 2.9 Beef Prices and Slaughter, 1965-1980 2.10 Indices of Agricultural and Non-Agricultural Wholesale Prices, 1972-1980 2.11 Indices of Grain Prices, 1969-1980 2.12 Input Prices in Terms of Soybeans, 1974-1980 2.13 Input Prices in Terms of Beef, 1974-1980 2.14 Tractor Sales, 1971-1980 2.15 Chaco: Total Area Planted and Distribution Among Main Crops, 1959-1979 2.16 Indices of Cotton Prices, 1971-1980 3. MANUFACTURING 3.1 Manufacturing Output and Employment, 1971-1980 3.2 Structure of the Manufacturing Sector, 1970-1980 3.3 Foreign Investment, 1977-1980 3.4 Commodity Exports, 1976- 1980 3.5 Imports' Share in Industrial Supply, 1950-1980 3.6 Merchandise Imports, 1970-1980 3.7 Changes in Labor Productivity in Industry, 1970- 1980 3.8 Employment in Industry, 1970-1979 3.9 Average Monthly Cost and Price Increases of Industrial Firms Compared with Increases of Wholesale Prices, Devaluation and International Inflation, 1979-1980 3.10 Profits, Size of Enterprise and Competitiveness, 1976-1980 3.11 Financial Ratios of Industrial Enterprises, 1976-1980 3.12 Absolute and Relative Price Increases in Industry, 1977-1980 3.13 Changes in Wages and Employment, 1977-1980 3.14 Average Profitability and Its Variation in Argentine Industry, 1977-1980 3.15 Output, Employment and Productivity, 1977-1980 3.16 Sales, Profits and Employment in Selected Firms, 1977-1980 3.17 Exports, Imports, and Import Competition in Selected Firms 3.18 Sources and Costs of Credit iii Selected Firms, 1978-1980 3.19 Commercial Bankrup;cy Liabilities, 197u-1980 - 79 - STATISTICAL APPENDIX 4. MONETARY STATISTICS 4.1 Monetary Base and Money Supply, 1977-1980 4.2 Liquidity Coefficients, 1970-1980 4.3 Distribution of Deposits and Liabilities in Argentine Banking System, 1978-1980 4.4 Average Monthly Interest Rates and Commercial Banks' Margins, 1974-1980 4.5 Banking Credit, 1974-1980 4.6 Sources of Investment Financing, 1967-1980 Table 1.1 Real Effective Exchange Rates for Major Imports and Exports, 1969-1980 (in Jan. 1980 pesos per US$) PRODUCTS Dec. '69 March '77 Jan. '79 Jan. '80 Feb. '81 a/ March/ April '81 b/ Import Exchange Rate (without tariffs or taxes) 2,172.8 2,446.6 1,990.3 1,659.7 1,528.3 1,870.1 Agricultural goods 1,955.5 2,691.3 2,189.3 1,825.7 1,734.4 2,179.4 Manufactured goods 3,716.8 3,929.3 3,164.6 2,409.3 2,327.4 2,924.6 Non-Durable consumer goods 3,042.0 3.526.6 2,943.3 2,589.1 Durable consumer goods 4,628.0 3,939.0 3,164.6 2,589.1 Intermediate goods 3,530.8 3,547.6 2,846.1 2,323.6 1 Machinery 4,128.3 4,036.9 3,124.8 2,522.7 oa Transport Equipment 3,932.8 4,575.1 3,642.2 2,970.8 c Export Exchange Rate (without taxes or subsidies) 2,126.5 2,309.4 1,941.5 1,650.3 1,519.7 1,909.7 Agricultural goods 1,914.0 2,194.0 1,862.0 1,590.1 1,478.8 1,909.7 Manufactured goods 3,126.0 3,127.4 2,699.8 2,305.6 2,190.3 2,752.3 Non-Durable consumer goods 2,064.0 3,117.2 2,703.5 2,309.8 Durable consumer goods 3,126.0 3,091.8 2,776.3 2,371.0 Intermediate goods 2,792.1 2,581.5 2,621.0 2,238.3 Machinery 3,126.0 3,472.7 2,770.5 2,366.0 Transport Equipment 3,147.2 3.510.2 2,724.6 2,326.8 a/ Estimates, includes 10% devaluation of February 2, 1981. b/ Estimates, includes the 28% devaluation of April 2, 1981. SOURCES: Import and Export Exchange Rate IMF. Inclusive of taxes, tariffs and subsidies for 1969 are derived from Berlinski and Schvdlowski. Incentives for Industrialization in Argentina, Baltimore: Johns Hopkins, 1981. - 81 - Table 1.2: Nominal Monthly Rates of Interest, Inflation and Devaluation, 1977-1981 Rate of Prime Rate for Borrowing Rate for Wholesale Devaluation Against Year Month Domestic Loans Foreign Loans a/ Price Increases US Dollars 1977 I. January February 4.5 7.8 8.2 7.0 March II. April May 5.5 5.7 6.2 5.1 June III. July August 8.2 7.2 8.5 6.5 September IV. October November 13.2 8.8 8.5 8.0 December 1978 1. January February 11.3 7.6 8.1 6.3 March II. April May 8.2 3.9 7.6 3.1 June III. July August 7.7 4.1 6.7 3.1 September IV. October November 7.6 6.1 8.3 5.0 December 1979 I. January February 7.2 5.9 8.7 4.8 March II. April May 7.2 5.6 8.7 4.4 June III. July August 7.7 5.1 9.1 3.8 September IV. October November 7.1 4.7 2.3 3.2 December 1980 1. January February 6.0 4.3 4.1 2.6 March II. April May 5.5 3.5 5.5 2.0 June III. July August 6.2 3.1 2.9 1.4 September IV. October November 5.6 2.8 2.9 1.0 December 1981 I. January b/ February 8.8 7.3 5.0 5.7 March a/ Eurodollar deposit rate and rate of devaluation and fees, the monthly rates of which were estimated to be .7% in 1977, 0.5% in 1978, 0.3% in 1979/80. b/ Estimated SOURCES: Ministry of Economy, INDEC; Central Bank, First Bank of Boston and Morgan Guarantee Trust. - 82 - Table 1.3: Change in Price Differentials Between Forei n and Domestically Produced Industrial Goods, 1977-1979 / June January August Weights according to 1977 1979 1979 Price Index Value Added (WPI) (V.A.) Textiles 1.69 .92 .68 30.2 11.4 Clothing 1.20 .43 .38 7.2 1.9 Paper 1.59 .89 .70 4.1 3.6 Chemical Substances 1.61 .83 .77 3.5 7.7 Other Chemicals 2.50 .95 .74 4.1 9.9 Rubber 2.00 1.19 1.01 2.2 2.4 Glass & Glassware 2.27 .70 .58 3.2 1.0 Cement & Other Non- Metallic Minerals 2.13 .79 .52 3.4 4.4 Iron & Steel 1.45 1.14 1.06 5.9 8.6 Non-Ferrous Metals 1.72 1.01 .72 3.6 0.9 Metal Products 2.44 1.41 1.01 12.9 7.6 Non-Electric Machinery 1.56 1.30 1.05 5.1 12.5 Electrical Machinery and Apparatus 1.69 .97 .72 9.3 6.0 Transport Equipment and Vehicles 2.08 1.79 1.52 5.1 21.9 Scientific Apparatus 1.35 .69 .56 .2 .4 TOTAL (WPI Weights)2/ 1.79 .90 .72 100 TOTAL (VA Weights) 2/ 1.81 1.09 .87 100 1/ Ratio of foreign prices c.i.f. Buenos Aires plus tariffs and fees over domestic prices of selected industrial goods. 2/ In order to evaluate the impact of redundancy on both, future inflation as well as output and employment, 15 industrial subsectors are weighted, first according to their. importance in the wholesale price index (WPI), and secondly according to their importance in valude added of 1978. (V.A.) SOURCE: Computed from Table 9.12, Economic Memorandum on Argentina, Report No. 2988-AR. Table 1.4: Relative Prices in Argentina and World Markets (per ton of wheat) 1970 1/ 1980 2/ 1970 1980 Argentina World 3/ Argentina World /(1):(2)/ /(3):(4)/ (1) (2) (3) (4) X 100 X 100 Meat (ton) 4.8 16.8 6.5 12.8 28.6 50.8 Soybeans (ton) 1.7 1.8 1.2 1.3 141.7 92.3 Corn (ton) 0.9 1.1 0.7 0.8 81.8 87.5 Milk (1,000 It) 2.7 2.3 2.4 1.9 117.4 126.3 Regular Gasoline (1,000 It) 1.8 2.4 2.2 4.4 75.0 50.0 Special Gasoline (1,000 It) 2.1 3.9 2.7 4.6 53.8 58.7 Fuel Oil 0.4 0.3 0.6 1.1 133.3 54.5 o Steelbars (ton) 2.3 1.5 2.7 2.0 153.3 135.0 Cold Rolled Flat Steel (ton) 4.2 2.6 5.3 2.7 151.5 211.7 Hot Rolled Flat Steel (ton) 3.5 2.2 4.4 2.4 159.1 183.3 Passenger Car (unit) 99.0 45.0 136.0 26.0 220.0 423.1 Harvester (unit) 256.9 175.7 412.0 211.9 146.2 194.4 Cement (ton) 4.9 3.4 6.3 3.21 114.1 196.9 1/ 1967-72 average. 2/ January/February 1980 3/ Average of 4 or more countries of the following group: US, UK, France, Italy, Holland, Germany, Japan, Canada. SOURCE: D.F. Cavallo, G.A. Parino "Apertura de la Economia y Cambio en los Precios Relativos:" Novedades Economicas (November 1980), pp. 28-32. Table 2.1: Production and Productivity in Corn, 1970-1980 AREA OUTPUT YIELD YEAR ha acre MT bu (million) (million) (million) (million) MT/ha bu/ha 1970/1971 5.0 12.5 10.0 393.6 2.0 31.5 1971/1972 4.4 11.0- 5.9 232.2 1.3 21.1 197?/1973 4.3 10.8 9.7 381.8 2.2 35.3 1973/1974 4.1 10.3 10.0 393.6 2.4 38.2 00 1974/1975 3.9 9.8 7.7 303.1 2.0 30.0 1975/1976 3.7 9.3 5.9 232.2 1.6 25.0 1976/1977 3.0 7.5 8.3 326.7 2.8 43.6 1977/1978 3.1 7.8 9.7 381.8 3.1 48.9 1978/1979 3.3 8.3 8.7 342.4 2.6 41.2 1979/198o 3.3 8.3 6.4 251.9 1.9 30.3 SOURCE: SEAG. NOTE: 1 ha = 2.5 acre; 1 MT = 39.36 bu. Table 2.2: Production and Productivity in Sunflower, 1970-1980 AREA OUTPUT YIELD YEAR ha acre MT bu MT/ha bu/ha (million) (million) (million) (million) 1970/1971 1.6 4.00 .8 29.4 .50 7.3 1971/1972 1.5 3.75 .8 29.4 .53 7.8 1972/1973 1.7 4.25 .9 33.0 .53 7.8 1973/1974 1.3 3.25 1.0 36.7 .77 11.3 1974/1975 1.2 3.00 .7 25.7 .58 8.5 t- 1975/1976 1.9 4.75 1.1 40.4 .58 8.5 1976/1977 1.5 3.75 .9 33.1 .60 8.8 1977/1978 2.2 5.50 1.6 58.8 .73 10.7 1978/1979 1.8 4.50 1.4 51.4 .78 11.5 1979/1980 2.0 5.00 1.5 55.1 .75 11.0 SOURCE: SEAG. NOTE: 1 ha = 2.5 acre; 1 MT = 36.74 bu. Table 2.3: Production and Productivity in Wheat, 1970-1980 AREA OUTPUT YIELD YEAR ha acre MT bu (million) (million) (million) (million) MT/ha bu/ha 1970/1971 4.1 10.25 4.3 157.9 1.04 15.3 1971/1972 4.7 11.75 5.0 183.7 1.06 15.6 1972/1973 5.3 13-25 7.3 268.2 1.37 20.1 1973/1974 3.9 9.75 5.0 183.7 1.28 18.8 00 1974/1975 4.9 12.25 5.5 202.1 1.12 16.5 1975/1976 5.4 13.50 8.0 193.9 1.48 21.7 1976/1977 6.7 16.75 10.6 389.5 1.58 23.2 1977/1978 4.6 11.50 5.2 191.0 1.13 16.6 1978/1979 5.2 13.00 8.1 297.6 1.56 22.9 1979/1980 5.0 12.50 7.7 282.9 1.54 22.6 SOURCE: SEAG. NOTE : 1 ha = 2.5 acre; 1 MT = 36.74 bu. Table 2.4: Production and Productivity in Grain Sorghum, 1970-1980 AREA OUTPUT YIELD YEAR ha acre MT bu MT/ha bu/ha (million) (million) (million) (million) 1970/1971 3.1 7.8 4.7 185.0 1.5 23.6 1971/1972 2.8 7.0 2.4 94.5 .9 14.1 1972/1973 3.0 7.5 5.0 196.8 1.7 26.8 1 1973/1974 3.1 7.8 5.9 232.2 1.9 30.0 1974/1975 2.6 6.5 4.8 188.9 1.8 28.3 1975/1976 2.4 6.0 5.1 200.7 2.1 33.0 1976/1977 2.8 7.0 6.6 259.8 2.3 36.2 1977/1978 2.7 6.7 7.2 283.4 2.7 42.5 1978/1979 2.5 6.3 6.2 244.0 2.5 39.4 1979/1980 1.9 4.8 3.0 118.1 1.6 25.2 SOURCE: SEAG. NOTE: 1 ha = 2.5 acre; 1 MT =39.36 bu. Table 2.5: Production and Productivity in Soybeans, 1970-1980 AREA OUTPUT YIELD YEAR ha acre MT bu (million) (million) (million) (million) MT/ha bu/ha 1970/1971 1971/1972 .1 .25 .1 3.7 1.0 14.7 1972/1973 .2 .50 .3 11.0 1.5 22.0 1973/1974 .4 1.00 .5 18.4 1.2 17.6 1 1974/1975 .4 1.00 .5 18.4 1.2 17.6 0 1975/1976 .5 1.25 .7 25.7 1.4 20.6 1 1976/1977 .7 1.75 1.4 51.4 2.0 29.4 1977/1978 1.2 3.00 7.5 91.8 2.0 29.4 1978/1979 1.6 4.00 3.7 135.9 2.3 33.8 1979/1980 1.8 4.50 3.2 117.6 1.8 26.5 SOURCE: SEAG NOTE: 1 ha = 2.5 acre; 1 MT = 36.74 bu. Table 2.6: Grain Production and Productivity, 1970-1980 YEAR Area Output Yield (million ha) (million MT) (MT/ha) 1970/1971 18.2 21.3 1.17 1971/1972 17.9 15.7 .87 1972/1973 19.2 25.5 1.32 1973/1974 17.4 25.3 1.45 1974/1975 17.5 20.7 1.18 1975/1976 18.0 22.2 1.23 1976/1977 19.8 29.2 1.47 1977/1978 18.8 28.1 1.49 1978/1979 18.8 30.0 1.59 1979/1980 19.0 23.5 1.23 SOURCE: SEAG. NOTE: Crops included are wheat, corn, grain sorghum, sunflower, soybeans, flaxseed, oats, barley and rye, Table 2.7: Main Grain Exports, 1970-1980 (million MT) YEAR Wheat Soybeans Corn Grain Other feed Total I Sorghum grains 1970 2.3. - 5.2 2.0 0.3 9.8 1971 0.8 - 6.1 2.2 0.2 9.3 1972 1.6 - 3.0 0.6 0.2 5.4 1 1973 3.0 - 4.0 2.1 0.4 9.5 ) 1974 1.7 - 5.5 3.1 0.4 10.7 1 1975 1.8 - 3.9 2.2 0.04 7.9 1976 3.2 - 3.1 3.4 0.05 9.7 1977 5.6 0.6 5.5 4.2 0.3 15.6 1978 1.6 2.0 6.0 4.5 0.4 12.5 1979 4.2 2.8 5.9 3.9 0.7 14.7 1980 (*) 4.1 2.6 3.5 1.5 0.4 12.2 SOURCE: SEAG. (*) : provisional. Table 2.8: Beefcattle Slaughter, Exports and Domestic Consumption, 1978-1980 Slaughter Exports (2):(1) Domestic consumption PERIOD (000 MT carcass weight) kg per capital/year (1) (2) December 1978 .......... 260 58 22 91 I Semester 1979 ....... 278 63 23 96 II Semester 1979 ....... 238 53 22 81 I Semester 1980 ....... 244 44 18 88 July/October 1980 ...... 244 33 14 93 SOURCE: J.N.C., S.E.A.G. and mission estimates. Slaughter and exports on monthly ave- rages. Table 2.9: Beef Prices and Slaughter, 1965-1980 BEEF PRICES PRICE OF BEEF RELA- SLAUGHTER (2) AVERAGE TIVE TO WHEAT WEIGHT YEAR Steers (1) Index Index Carcass (kg LW/head) $a/kg 1970= 100 (1) 1970= 100 Head Weight 1965/1969 .83 80 5.2 85 11.870 2.456 208 1970 1.04 100 6.1 100 12.924 2.624 203 1971 1.43 138 7.8 128 9.467 2.001 211 1972 1.39 134 9.2 151 10.010 2.191 219 1973 1.35 130 6.6 108 9.817 2.149 219 1974 1.01 97 5.2 85 10.114 2.163 214 1975 .54 52 3.0 49 12.146 2.438 201 1976 .62 60 3.8 62 13.868 2.811 203 1977 .83 80 5.2 85 14.748 2.913 198 1978 .70 67 4.3 70 16.449 3.193 194 1979 .96 92 6.7 110 15.617 3.092 198 1980((10m) .84 81 5.8 95 12,04(1 2.450 203 SOURCE: Junta Nacional de Carnes. NOTE: (1) 1970 pesos per kg liveweight. (2) heads in thousand, carcass weight in 000 MT. - 93 - Table 2.10: Indices of Agricultural and Non-agricultural Wholesale Prices 1972-1980 PERIOD Agricultural Non Agricultural Ratio (1) (2) (1):(2) 1972 288.8 216.7 1.33 1973 404.6 327.9 1.23 1974 452.2 437.0 1.03 1975 1,109.3 1,645.2 .67 1976 6,979.8 9,220.9 .76 1977 I 14,407.6 19,731.3 .92 II 22,239.2 21,225.6 1.05 1978 I 33,885.3 41,113.3 .82 II 54,618.8 61,154.2 .89 1979 I 85,193.3 97,932.3 .87 II 137,462.5 151,997.8 .90 1980 I 163,678.0 202,276.8 .81 I (*) 199,879.0 243,750.0 .82 SOURCE: INDEC, SEAG. /1 excluding food, beverages, clothing and tobacco Table 2.11: Indices of Grain Prices, 1969-1980 (1969/70 = 100) YEAR Wheat Corn Grain Soybeans Sunflower Sorghum 1969/1970 100 100 100 100 100 1970/1971 108 98 109 109 122 1971/1972 89 90 97 120 138 1972/1973 121 105 107 138 115 1973/1974 115 105 122 125 115 1974/1975 106 87 100 70 74 1975/1976 97 69 85 95 84 1976/1977 93 93 105 173 154 1977/1978 97 93 96 105 102 1978/1979 85 68 71 82 93 1979/1980 85 68 82 51 47 Index 100 ($a of 1970/MT) 169 166 121 312 311 SOURCE: SEAG. NOTE: Marketing season prices deflated by the WPI for non agricultural godds exclu- ding food, beverages, clothing and tobacco. Table 2.12: Input Prices in Terms of Soybeans, 1974-1980 (MT of soybeans per unit of input) Wage PERIOD I Combine Tractor Fertilizer PI(medium) (68 HA) 18-46-0 (unskilled worker (MT) per month) 1974/1975 220 95 3.7 1.1 1975/1976 148 78 3.2 .4 1976/1977 95 45 1.0 .2 1977/1978 172 1.0 .3 1978/1979 223 99 1.5 .5 Jan/March 1979 218 92 1.5 .4 April/June 1979 220 99 1.7 .5 July/September 1979 211 104 1.8 .5 October/December 1979 270 135 2.1 .6 Jan/March 1980 308 147 2.6 .9 April/June 1980 386 153 2.9 1.0 July/September 1980 348 118 2.4 .9 October 1980 308 110 2.5 .8 SOURCE: SEAG. NOTE: Prices frnm 1974 to 1979 correspond to the marketing season. Table 2.13: Input Prices in Terms of Beef , 1974-1980 (MT liveweight per unit of input) Tractor Fertilizer Gas-oil Wage YEAR Quarter (68 HP) 18-46-0 (1000 1ts) nskiIled worker I (MT) ( (MT) _per month) 1974 23 .98 .30 .32 1975 46 1.69 .28 .46 1976 36 1.46 .34 .20 1977 31 .71 .26 .15 1978 37 .78 .41 .15 1979 1st. 29 .47 .31 .14 2nd. 28 .47 .29 .14 3nd. 22 .38 .20 .11 4nd. 27 .43 .23 .13 1980 1st. 30 .53 .25 .18 2nd. 27 .52 .26 .19 3nd. 26 .53 .30 .20 October 30 .69 .34 .22 SOURCE: SEAG. - 97 - Table 2.14: Tractor Sales, 1971-1980 (Unit Sales) YEAR Domestic Imported Total 1971 13,749 13,749 1972 14,866 14,866 1973 18,782 18,782 1974 20,650 20,650 1975 15,210 15,210 1976 21,066 21,066 1977 21,932 21,932 1978 6,309 167 16,476 1979 7,117 700 (*) 7,817 1980 (first 9 months) 2,587 1.052 3.639 SOURCE: AFAT (Asociaci6n Argentina Fabricantes de Tractores). NOTE: (*) estimated. - 98 - Table 2.15: CHACO: Total Area Planted And Distribution Among Main Crops 1959-1979 Percentages of total area Total area Sun- Grain YEAR planted Cotton flower sorghum Wheat Corn (000 ha) 1959/1960 527 80 1 3 - 16 1969/1970 573 60 10 3 - 18 1969/1970 637 42 10 33 9 6 1975/1976 603 47 27 15 8 3 1977/1978 772 45 '31 15 5 3 1978/1979 819 54 21 19 3 3 SOURCE: SEAG and Government of Chaco. - 99 - Table 2.16: Indices of Cotton Prices, 1971-1980 (1971=100) FARM GATE PRICES Cotton Lint ("C") YEAR Argentina USA Argentina (1) (2) (3) 1971 100 100 100 1972 162 92 137 1973 156 132 142 1974 183 108 178 1975 63 118 107, 1976 78 125 105 1977 109 109 108 1978 67 113 80 1979 56 107 63 1980 44 n.a. 56 SOURCES: SEAG, INDEC, USDA and Dept. of Commerce. NOTE: Index 100 stands for $a 625/MT of raw cotton in 1970 prices in co- lumn (1), 43.2USi pound for American upland cotton, season average, 1975 U$ dollars, And .46 $a/kg of cotton lint "C" in $a of 1960. Table 3.1: Manufacturing Output and Employment, 1971-1980 Manufacturing Output GDP (at Factor Costs) Industrial Employment (1) (2) (3) (4) (5) (6) (7) No(8 Year Total Annual Total Annual (2):(4) No. of N in 1970 $a Change in 1970 $a Change in % Workers Hours billion in % billion in % 1970=100 1971-73 24.2 - 83.7 - 29.0 105.6 106.1 1974 26.7 +10.3 91.6 +9.5 29.2 114.8 114.0 1975 25.9 -3.0 90.8 -0.9 28.6 119.2 115.5 a 1976 25.4 -1.9 90.5 +0.2 28.1 115.3 113.4 1977 26.9 +5.9 96.0 +6.0 28.1 108.2 112.8 1978 24.0 -10.8 92.3 -3.9 26.0 97.7 101.0 1979 26.2 +9.2 98.6 +6.8 26.6 95.6 102.3 1980 25.3 -3.5 99.7 +1.1 25.4 88.1 93.3 SOURCE: Central Bank, Ministry of Economy, INPE Table 3.2: Structure of the Manufacturing Sector, 1970-1980 (Participation in Percent) INDUSTRY 1970 1974 1975 1976 1977 1978 1979 1980 a/ Food, Beverages & Tobacco 25.7 24.1 24.4 25.6 22.7 24.1 22.4 22.5 Textiles, Clothing & Shoes 12.5 12.2 12.0 11.6 11.3 10.9 11.1 10.5 Wood and Wood Products 2.0 2.0 1.9 1.6 1.6 1.7 1.8 1.8 Paper and Printing 5.4 5.3 5.5 4.9 4.6 5.4 5.0 4.8 Chemicals, Petroleum Derivatives, Rubber 12.9 12.5 13.1 13.6 13.0 13.4 13.8 13.7 Non-Metallic Minerals 5.3 4.9 5.2 5.1 4.8 5.4 5.3 5.8 Basic Metals 4.7 5.1 5.0 4.6 5.0 5.3 5.7 5.5 Metal Products, Machinery & Equipment, Transport Vehicles 25.0 27.4 26.4 26.4 30.5 27.3 28.4 28.9 Other Industries 6.5 6.5 6.5 6.6 6.5 6.5 6.5 6.5 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 a/ First Semester SOURCE: Central Bank of Argentina - 102 - Table 3.3: Foreign Investment, 1977-1980 1/ (in US$ million) Amount Distribution Industry 1977/79 2/ 1979/80 3/ 1977/80 5/79 12/80 Oil and Gas 409 219 628 63.3 34.1 Manufacturing 150 713 863 23.2 46.9 Auto - Industry 16 419 435 2.5 23.6 Machinery 28 58 86 4.3 4.7 Food, Beverages, Tobacco 13 58 71 2.0 3.9 Pharmaceuticals 13 54 67 2.0 3.7 Chemicals 25 13 38 3.9 2.1 Cement - 32 32 0.0 1.7 Steel and Other Metals 13 15 28 2.0 1.5 Autoparts 1 26 27 0.2 1.5 Petrochemicals 5 12 17 0.8 0.9 Electrical Material 8 7 15 1.2 0.8 Telecommunications Equipment 2 9 11 0.4 0.6 Other Industries 36 10 46 5.6 2.5 Other Branches 86 254 341 13.5 18.5 of which Banks 35 167 202 5.4 11.0 Fishing 17 13 30 2.6 1.6 TOTAL 646 1,196 1,842 100.0 100.0 1/ Registered and Approved March 1977 to December 1980 2/ March 1971 to March 1979 3/ April 1979 to December 1980 SOURCE: Ministry of Economy, Subsecretary of Foreign Investment - 103 - Table 3.4: Commodity Exports, 1976- 1980 (in US$ Million) 1976 1977 1978 1979 1980 1/ TOTAL 3,916 5,652 6,400 7,811 8,028 Major Agricultural Products 2,070 3,082 3,282 4,586 4,405 Wheat 431 541 173 614 815 Corn 362 518 587 613 512 Sorghum 335 344 358 333 208 Seeds and Oilseeds 23 210 567 759 633 Vegetable and Animal Oils 176 370 391 540 524 Beef 251 331 426 752 568 Hides and Skins 152 210 278 461 367 Wool 125 217 221 222 270 Fruit (fresh) 135 180 227 226 197 Sugar 80 161 54 66 311 Other Agricultural and Agro-Based Products 900 1,264 1,451 1,581 1,374 Mineral Products 28 38 74 69 316 Petroleum Derivation 19 28 53 49 280 Industrial Products 918 1,268 1,593 1,547 1,933 Textiles 114 170 252 141 204 Leather Products 49 97 155 210 367 Chemical Products 133 156 200 241 346 Metals 131 129 302 305 323 Machinery 202 244 286 304 345 Transport Equipment 201 231 218 182 174 Other 88 241 180 191 172 Share of Industrial Products In Total Exports 23.4 22.4 24.9 20.1 24.1 Textiles 2.9 3.0 3.9 1.8 2.5 Leather Manufacturers 1.3 1.7 2.4 2.7 4.6 Chemical Products 3.4 2.8 3.1 3.1 4.3 Metal Products 3.4 2.2 4.1 3.9 4.0 Machinery 5.2 4.3 4.5 3.9 4.3 Transport Equipment 5.2 4.1 3.4 2.3 2.2 Other 2.2 4.3 2.8 2.4 2.2 1/ Estimated SOURCE: Ministry of Economy, INDEC - 104 - Table 3.5: Imports' Share in Industrial Supply, 1950-1980 (in percent) Industry 1950 1960 1967 1970/71 1975/76 1979/80 Consumer Goods Food, Beverage 2.1 9.8 1.8) Tobacco 6.1 0.5 0.5) 0.6 2.9 8.6 Textiles 13.0 4.2 4.7) Clothing 1.9 0.2 0.2) 4.0 2.8 10.2 Intermediate Goods Wood & Products 18.6 15.3 15.3 16.5 26.3 45.4 Paper & Products 26.4 16.3 19.5 17.3 20.1 23.5 Chemicals 16.4 14.0 16.5 15.0 27.4 36.1 Non-Metallic Minerals 9.9 2.4 4.2 3.6 9.8 15.0 Capital Goods Basic Metals 33.9 21.8 10.4 18.5 23.0 24.1 Machinery & Vehicles 40.4 24.5 13.8) Electrical Machinery ) 28.3 17.5 28.2 & Appliances 40.7 7.2 7.3) Other Industrial Goods 24.7 19.7 19.7 11.2 15.6 21.2 TOTAL 15.2 11.0 8.3 11.8 18.5 24.9 SOURCE: Ministry of Economy, CONADE: 1950-67. From 1971-79 Mission estimates based on data supplied by INDEC, Central Bank, and FIDE. Table 3.6: Merchandise Imports, 1970-1980 (in USS million and in %) 70/71 74/76 76 77 78 79 80 a/ 79 b/ 80 b/ Import Shares 70__1_74/75 180 c/ Food, Beverages, Tobacco 48 88 42 60 103 501 480 223 325 2.7 2.3 5.1 Other Consumer Goods 28 45 24 76 106 237 969 208 656 1.6 1.2 8.0 Fuel and Lubricants 101 521 530 685 339 1,119 1165 877 789 5.7 13.7 15.5 Intermediate Products 1j213 2 641 1,934 2,230 2,214 4.404 5.034 1.657 3.408 68.1 69.6 47.1 Minerals 47 101 120 124 102 170 70 49 Metals 351 889 505 516 380 610 354 697 Chemicals 224 631 516 590 528 830 442 696 Paper Products 97 186 139 159 181 220 105 201 Lumber 72 100 36 53 54 125 50 74 Machinery Parts 132 204 125 227 215 380 220 685 Plastics and Rubber 55 163 129 144 169 335 148 188 Textiles n.a. n.a. n.a. n.a. n.a. 158 75 150 Others 235 367 364 417 585 1,576 193 668 0 Capital Goods 392 497 503 1,111 1J07 1.5 2.5 -137 1,6 22.0 13.1 24.3 Total Merchandise Imports (c.i.f.) 1,782 3,792 3,033 4,162 3,835 7 810 10,400 3,702 7,041 100.0 100.0 100.0 a/ Estimated on nine months' share, except for capital goods. b/ First nine months. c/ Imports structure of first nine months of both years. SOURCE: Ministerio de Economia, INDEC and mission estimates. - 106 - Table 3.7: Changes in Labor Productivity in Industry, 1970-1980 I II Employ- Hours Productivity Productivity Years Output ment Worked I II 1970 100.0 100.0 100.0 100.0 100.0 1971 106.9 103.0 103.5 103.8 103.3 1972 112.8 105.3 105.8 107.1 106.6 1973 116.8 108.6 108.9 107.6 107.2 1974 122.7 113.8 114.0 106.9 107.6 1975 118.3 119.2 115.5 99.3 107.3 1976 121.4 115.3 113.4 105.3 107.1 1977 121.4 108.2 112.8 112.2 107.6 1978 108.1 97.7 101.0 110.6 107.0 1979 125.1 95.6 102.3 130.9 122.3 1980 122.2 88.1 93.3 138.7 131.0 SOURCE: Ministry of Economy, INPE, Analisis de la Productividad de la Mano de Obra, Buenos Aires, 1980. Table 3.8: Employment in Industry, 1970-1979 1970/71 1975/76 1977 1978 1979 1980 Number of Workers 101.5 117.2 108.2 97.7 95.6 n.a. Hours Worked 101.7 114.5 112.8 101.0 102.3 n.a. Employment Structure 1970-79 Food, Beverages, Tobacco 22.4 22.7 Textiles and Clothing 14.4 11.6 Leather and Shoes 3.5 3.2 Wood and Wood Products 6.4 5.9 Paper and Printing 4.7 4.6 Chemicals 6.5 6.5 Plastics and Rubber 2.3 3.1 Non Metallic Minerals 1.2 1.8 Basic Metal 4.5 5.6 Bl Metal Products 8.0 8.3 Non Electric Machinery 5.6 5.3 Electrical Machinery 4.5 3.7 Vehicles and Transport Equipment 9.7 10.5 Construction 5.6 5.4 Others 0.7 1.8 TOTAL 100.0 100.0 SOURCE: Ministerio de Economia, INPE, Analisis de la Productividad de la Mano de Obra, 1980 - 108 - Table 3.9: Average Monthly Cost and Price Increases of Industrial Firms Compared with Increases of Wholesale Prices, Devaluation and International Inflation, 1979-1980 Rate of Major Non-Agricultural Exchange Industrial Firms Domestic Wholesale Rate International Year Costs Prices Prices Devaluation Prices 1/ 1979 Quarter I 8.5 6.7 9.3 4.9 2.9 II 7.3 7.3 8.3 4.4 2.0 III 7.7 8.3 8.2 3.8 1.6 IV 4.9 4.8 3.6 3.2 1.1 1980 Quarter I 3.8 4.0 4.9 2.6 1.7 II 4.4 4.0 4.8 2.0 1.5 III 4.0 3.4 3.2 1.4 1.2 IV 3.2 2.9 4.5 1.0 1.1 1/ For calculation of international prices, see Economic Memorandum on Argentina, Report No. 2988-AR. SOURCES: ACDE, Centro de Estudios de la Empresa, Tendencias de la Industria, Ministry of Economy, INDEC and Central Bank of Argentina. - 109 - Table 3.10: Profits, Size of Enterprise and Competitiveness, 1976-1980 Sample of Industrial Corporations 1976 1977 1978 1979 1980 1. All Firms 1. Sales 100.0 100.0 100.0 100.0 100.0 2. Production Costs 68.6 72.9 71.4 73.8 78.8 3. Gross Margins 31.4 27.1 28.6 26.2 21.2 4. Financial Costs 9.3 10.4 13.0 9.8 8.5 5. Other Costs 1/ 18.0 15.1 18.6 17.8 18.9 6. Net Profit 4.1 1.6 -3.0 -0.9 -5.3 II. LARGE FIRMS 2/ 1. Sales 100.0 100.0 100.0 100.0 100.0 2. Production Costs 68.9 73.6 72.1 74.3 79.5 3. Gross Margins 31.1 26.4 27.9 25.7 20.5 4. Financial Costs 9.5 10.1 12.3 9.0 8.1 5. Other Costs 1/ 18.0 14.7 18.3 17.0 17.6 6. Net Profit 3.6 1.6 -2.7 -0.3 -5.2 III. MEDIUM-SIZED FIRMS 1. Sales 100.0 100.0 100.0 100.0 100.0 2. Production Costs 63.0 59.7 56.3 60.7 62.5 3. Gross Margins 37.0 40.3 43.7 39.3 37.5 4. Financial Costs 6.0 17.6 27.8 29.7 17.2 5. Other Costs 1/ 19.7 22.0 24.3 25.5 28.1 6. Net Profit 11.3 0.7 -8.4 -15.9 -7.8 IV. IMPORT COMPETING FIRMS 3/ 1. Sales 100.0 100.0 100.0 100.0 100.0 2. Production Costs 65.6 73.1 71.9 72.9 78.0 3. Gross Margins 34.4 26.9 28.1 27.1 22.0 4. Financial Costs 8.9 10.7 14.3 11.3 10.5 5. Other Costs 1/ 19.3 15.5 17.8 18.3 19.8 6. Net Profit 6.2 0.7 -4.0 -2.5 -8.3 V. FIRMS WITH NON TRADED PRODUCTS 1. Sales 100.0 100.0 100.0 100.0 100.0 2. Production Costs 72.8 72.7 70.4 75.1 80.0 3. Gross Margins 27.2 27.3 29.6 24.9 20.0 4. Financial Costs 9.9 9.9 10.7 7.6 5.6 5. Other Costs 1/ 16.3 14.6 20.0 15.8 15.6 6. Net Profit 1.0 3.2 -1.1 1.5 -1.2 1/ Outlays for marketing, organization and other miscellaneous items. 2/ Firms, which sold over the equivalent of US$7 million per year. 3/ The distinction between industries producing traded or non-traded goods was made on the basis of a correlation of annual price increases and the rate of devaluation. The dividing line was a correlation coefficient of 0.5. SOURCE: D.T. Carvallo and A.H. Petrei, "Financing Private Bueiness in an Inflationary Context. The Experience of Argentine 1967-1980". Paper presented at Conference on Financial Policies and the World Capital Market. The Problem of Latin American Countries, Mexico City, March 26-27, 1981. - 110 - Table 3.11: Financial Ratios of Industrial Enterprises, 1976-1980 Sample of 78 Industrial Corporations 1976 1977 1978 1979 1980 I. ALL FIRMS 1. Inventories 21.8 20.4 16.7 16.3 16.4 2. Fixed Assets 59.6 56.4 63.1 64.5 64.0 3. Short-term debt 30.2 36.5 31.7 31.1 31.7 4. Long-term debt 10.2 9.5 18.2 20.1 19.8 5. Net worth 59.6 54.0 50.1 48.8 48.5 6. Leverage 67.9 85.2 99.6 104.9 106.2 7. Liquidity 61.8 64.5 63.7 61.7 61.8 8. Immobilization 79.3 103.1 125.1 130.1 129.3 II. LARGE FIRMS 1. Inventories 22.2 20.5 16.6 10.2 17.0 2. Fixed Assets 59.8 56.4 63.5 64.9 62.5 3. Short-term debt 29.7 36.6 31.4 30.7 31.8 4. Long-term debt 10.6 9.4 18.5 20.5 19.9 5. Net worth 59.7 54.0 50.1 48.8 48.3 6. Leverage 67.5 85.2 99.6 104.9 107.0 7. Liquidity 60.6 63.1 63.6 61.6 64.5 8. Immobilization 100.1 104.4 126.7 133.0 129.4 III. SMALL FIRMS 1. Inventories 15.5 17.9 17.6 18.1 18.7 2. Fixed Assets 55.3 54.6 54.9 58.7 56.7 3. Short-term debt 34.0 35.9 38.8 42.8 39.6 4. Long-term debt 4.6 7.2 8.6 5.3 6.4 5. Net worth 61.4 56.9 52.6 51.9 34.0 6. Leverage 62.9 75.7 90.1 92.7 85.2 7. Liquidity 85.9 75.8 70.9 58.9 62.1 8. Immobilization 90.1 88.2 90.5 102.3 83.1 IV. IMPORT COMPETING FIRMS 1. Inventories 17.1 18.9 16.1 15.0 15.2 2. Fixed Assets 65.4 59.8 64.3 66.7 67.5 3. Short-term debt 27.8 36.1 34.9 32.6 34.0 4. Long-term debt 9.8 8.8 12.5 15.6 17.5 5. Net worth 62.4 55.1 52.6 51.8 48.5 6. Leverage 60.3 81.5 90.1 93.1 106.2 7. Liquidity 62.9 59.0 56.2 56.1 50.9 8. Immobilization 104.8 108.5 122.2 128.8 130.2 V. FIRMS WITH NON TRADED PRODUCTS 1. Inventories 29.1 23.0 17.7 18.4 18.0 2. Fixed Assets 50.9 50.0 61.2 61.2 59.0 3. Short-term debt 32.7 37.2 26.3 28.7 28.4 4. Long-term debt 11.6 10.1 27.4 26.5 22.5 5. Net worth 55.7 52.7 46.3 44.8 49.1 6. Leverage 79.5 89.8 116.0 123.2 103.7 7. Liquidity 61.2 72.6 80.2 71.1 81.0 8. Immobilization 91.4 94.9 132.2 136.6 120.2 (1) and (2) are in percent of total assets. (3), (4) and (5) are in percent of total liabilities. (6) = (Total debt/Net worth) x 100. (7) = [(Cash + Investment + Credit)/Short-term debt]) x 100. (8) = (Fixed Assets/Net worth) x 100. SOURCE: D.T. Cavallo and A.H. Petrei, "Financing Private Business in an Inflationary Context. The Experience of Argentina 1967-1980". Paper presented at Conference on Financial Policies and the World Capital Market. The Problem of Latin American Countries. Mexico City, March 26-27, 1981. - 111 - Table 3.12: Absolute and Relative Price Increases in Industry, 1977-1980 a/ 1977/78 1978/79 1979/80r/ INDUSTRIES Absolute Relative Absolute Relative Absolute Relative With Continuously High ----------------------------------------PRICES-------------------------------------- Effective Protection (% Change in Nominal Terms) Sugar & Other 117.7 84.9 113.8 92.7 87.5 116.7 Tobacco Products 159.5 101.1 131.8 100.5 84.3 114.7 Printing & Publishing 197.5 116.0 141.9 104.9 106.7 128.6 Pharmaceuticals 159.6 101.2 119.3 95.1 92.8 Petrochemicals 155.6 99.6 102.3 87.7 97.4 122.4 Cement 207.0 119.7 188.4 125.3 92.8 120.0 Other Construction Material 202.1 119.7 154.0 110.2 92.8 120.0 Indistrial Construction 137.0 92.4 161.2 113.7 99.2 124.0 Automobiles & Parts 130.9 90.0 133.6 101.3 81.8 113.2 Rubber Products 154.2 99.1 126.8 98.4 83.6 114.3 Simple Average 162.1 104.5 137.3 105.1 98.1 151.2 Weighted Average c/ 152.3 131.6 88.2 With Increased Import Competition Food & Beverages 166.5 103.9 132.9 101.0 53.2 95.3 Meat Packers 177.6 108.2 160.6 113.0 51.0 94.0 Textiles & Clothing 162.9 102.5 156.9 111.4 49.7 93.2 Paper & Products 160.9 101.7 170.9 117.5 49.8 Leather & Leather Products 145.2 93.1 208.1 159.3 39.7 65.4 Cosmetics & Cleaning Material 204.1 118.6 130.6 100.0 73.1 107.8 Iron & Steel 150.3 101.1 103.7 88.8 76.9 116.1 Metal Products 118.6 85.3 145.7 106.6 41.4 88.0 Electric Machinery & Apparatus 143.8 95.0 122.4 96.5 64.5 102.4 Tractors 130.2 89.8 130.6 97.4 61.6 100.3 Simple Average 156.0 100.8 146.3 112.0 56.0 92.3 Weighted Average c/ 155.1 140.1 55.6 Non-agricultural Wholesale Price 156.5 100 130.6 100 60.7 100 Imported Product Prices 75.9 68.5 93.0 83.7 61.7 Construction Prices 137.0 92.4 161.2 113.7 105.0 128.0 Consumer Prices 175.5 107.4 158.4 112.1 84.0 114.5 a/ The relative price increase compare industrial prices with overall non-agricultural wholesale prices. b/ September 1979 to September 1980 c/ Weighted according to participation rate in value added, see Table 3.2. SOURCE: Computed from wholesale and retail price indicators published by INDEC, Ministry of Economy Table 3.13: Changes in Wages and Employment, 1977-1980 Average Wage (changes in %) Hours Worked (1970=100) Industries 1977/78 1978/79 1979/80 1977 1978 1979 1980 With Continuously High Effective Protection Cigarettes & Tobacco 167.2 207.5 145.6 112.3 111.6 106.3 100.7 Printing & Publishing 183.1 198.8 154.8 81.9 80.9 80.1 88.9 Pharmaceuticals & Other Chemical Products 176.8 182.2 129.1 103.4 89.6 25.6 83.0 Oil & Gas Byproducts 166.7 176.8 132.8 92.7 91.4 85.4 81.2 Rubber Products 123.4 230.0 123.3 136.7 121.0 144.4 132.6 Cement & Other NM Minerals 148.8 202.3 136.5 97.8 92.8 95.6 91.7 Non- ferrous metals 158.0 184.1 135.5 147.3 138.2 145.0 138.2 Transportation Material 163.7 208.7 128.7 125.9 101.0 110.3 106.6 Simple Average 161.0 198.8 135.8 112.3 103.3 106.6 102.9 Weighted Average a/ 162.3 202.1 133.8 (1977) = 100.0 92.0 94.9 91.6 With Increased Import Competition Food, Beverages 153.0 199.4 117.9 120.4 115.1 115.9 115.8 Textiles & Clothing 149.4 193.7 114.3 100.1 99.0 96.1 65.1 Leather & Shoes 157.2 196.5 111.4 121.8 107.1 101.4 81.9 Paper & Carton 159.9 178.4 115.1 119.9 121.0 121.7 101.3 Chemicals 181.5 181.6 113.3 118.5 107.4 107.3 99.9 Glass & Porcelin 166.7 198.8 107.1 103.9 104.3 109.4 101.3 Iron & Steel 172.3 177.8 111.0 130.9 118.1 120.2 113.2 Metal Products 163.9 191.6 121.3 113.2 102.7 109.8 96.8 Machinery 162.0 175.3 125.6 99.8 85.5 87.3 73.7 Simple Average 162.9 188.1 115.2 114.3 105.5 106.6 94.3 Weighted Average a/ 156.2 191.4 115.6 (1977) = 100.0 92.3 93.3 82.5 a/ Weighted according to participation in total manufacturing employment. SOURCE: Ministry of Economy, Treasury and Finance, Economic Report, Statistical Review. Buenos Aires, 1981 - 113 - Table 3.14: Average Profitability and Its Variation in Argentine Industry, 1977-1980 Average Profit-Sales Ratios INDUSTRIES 1977 19/8 1979 1980 a/ With Continuously High Effective Protection Sugar 11.1 -8.6 .7 4.1 Cigarettes -2.1 1.3 3.1 1.1 Printing 5.0 18.0 14.4 Pharmaceuticals 3.6 4.3 3.4 Petrochemicals 10.8 4.9 7.6 3.8 Cement 8.0 9.0 16.8 8.8 Other Construction Material 10.3 11.3 12.0 6.0 Industrial Construction 10.3 9.4 12.0 3.6 Automobiles & Parts 3.9 2.8 7.1 5.4 Shipbuilding 12.8 10.2 5.3 Average 7.4 6.2 8.2 4.7 Coefficient of Variation b/ 2.1 2.5 2.2 With Increased Import Competition Food & Beverages 5.4 1.7 2.2 3.8 Meat Packers -4.5 -2.6 -1.7 Textiles & Clothing .6 1.6 1.6 3.6 Paper -5.0 -3.8 -5.0 -26.3 Rubber .9 3.8 0.0 -6.5 Cosmetics & Cleaning Material 2.5 8.0 8.3 8.2 Iron & Steel -4.9 -16.9 -8.1 1.0 Metal Products 5.1 2.9 8.4 3.3 Electric Machinery & Apparatus 11.8 10.8 11.8 0.1 Tractors & Agricultural Machinery 6.4 -18.4 -17.3 Average 1.8 -1.3 0.4 -2.9 Coefficient of Variation b/ 1.9 2.5 2.8 a/ First quarter; for 1980 variance was not computed because sample was too small. b/ The coefficient of vatiation is V 6; whereS* is the standard deviation and.9 the simple average. SOURCE: Computed from Balance Sheet Data of Corporations, MERCADO 1978, 1979, 1980, 1981 Table 3.15: Output, Employment and Productivity 1977-1980 (1970=-100) ---------------1977--------------- ---------------1978--------------- ---------------1979--------------- ---------------1980--------------- Industries Output Employment Productivity Output Employment Productivity Output Employment Productivity Output Employment Productivity With Continuing High Effective Protection Cigarettes & Tobacco 121.8 112.3 108.5 123.2 111.6 110.4 131.2 106.3 123.4 126.9 100.7 126.0 Printing & Publishing 97.4 81.9 118.9 100.4 80.9 124.1 93.2 80.1 116.5 98.5 88.9 110.8 Pharmaceuticals & Other Chemicals 126.4 103.4 121.7 112.2 89.6 125.2 120.6 85.6 140.9 127.0 83.0 153.0 Rubber Products 149.1 136.7 109.1 130. 7 121.0 103.7 102.2 144.4 112.3 151.2 132.6 114.0 Cement & Other Non- Metallic Minerals 117.3 97.8 119.1 116.8 92.8 124.8 121.9 95.6 127.5 118.4 91.7 129.1 Non-Ferrous Metals 109.3 147.3 74.2 95.9 138.2 69.4 129.8 145.0 89.5 139.0 138.2 100.6 Transport Material 118.3 125.9 94.0 93.3 101.0 92.4 128.6 110.3 116.6 144.0 106.6 135.1 Simple Average 119.9 113.4 105.8 110.4 105.3 104.2 118.2 101.5 116.5 129.3 105.6 122.4 Weighted Average 1/ 2/ 119.1 117.1 101.7 107.9 107.7 100.2 131.7 111.1 118.5 139.8 107.2 130.4 With Increased Import Competition Food & Beverages 111.7 120.4 97.2 107.8 115.1 93.7 116.7 115.9 100.7 117.9 115.8 101.8 Textiles & Clothing 115.3 100.1 115.2 96.5 99.0 97.4 109.4 96.1 113.9 92.8 65.1 142.6 Leather Goods & Shoes 91.1 121.8 74.8 89.6 107.1 83.7 82.0 101.4 80.8 70.9 81.9 86.5 Paper & Carton 115.1 119.9 96.0 118.7 121.0 98.1 133.0 121.7 109.3 108.9 101.3 107.5 Chemicals 140.0 118.5 118.1 120.2 107.4 119.9 152.7 107.3 142.3 131.8 99.9 131.9 Glass & Porcelin 93.0 103.9 89.5 93.5 104.3 89.6 106.5 109.4 97.3 100.8 101.3 99.5 Iron & Steel 119.9 130.9 91.6 101.3 118.1 85.8 185.0 120.2 153.9 180.2 113.2 159.2 Metal Products 135.0 113.2 119.3 115.0 102.7 112.0 131.4 109.8 119.7 123.4 96.8 127.5 Machinery 163.3 99.8 163.6 122.6 85.5 143.4 130.6 87.3 149.6 118.5 73.7 160.8 Simple Average 120.5 112.4 107.2 107.2 104.5 102.6 127.4 107.5 118.6 116.1 93.6 124.1 Weighted Average 1/ 124.2 111.0 111.9 107.8 102.5 105.2 123.8 103.5 119.6 113.5 90.5 125.5 1/ Working hours per year. 2/ Weighted according to participation in manufacturing value added. SOURCE: Ministry of Economy, Treasury and Finance, Economic Report, Statistical Review, Buenos Aires, 1981 Table 3.16: Sales, Profits and Employment in Selected Firms, 1977-1980 Change in Profits/Sales Firm Number of Employment (Percent) No. Product Workers since 1977 Trend in Monthly Sales 1979 1980 1 Spinning, weaving, garments 300 down from 800 stable n.a. n.a. 2 Spinning-weaving 750 reduced stable 3 -12.2 3 Spinning 150 down from 350 reduced by 80% 1.6 n.a. 4 Garments 147 stable increasing n.a. n.a. 5 Garments 600 down from 800 reduced by 40% 16 2.5 1 6 Shoes 200 reduced increasing after sharp drop 19.7 n.a. 7 Red bricks 200 stable stable 4.6 5.0 LI 8 Red bricks 220 stable stable n.a. 18.0 9 Ceramic floors 150 reduced increasing 4.5 6.1 10 Cement very large reduced increasing 8.5 13.9 4 factories 11 Prefabricated structures 170 reduced by 35% stable 16 12 12 Paints 50 stable increased by 27% 10.4 5 13 Paints 575 increasing increased by 25% -4 4 /1 14 Glass for cars and doors 400 reduced increasing 15 7 15 Motors 500 reduced from 1500 reduced by 73% 2.4 -3 16 Oleo-hydraulic components 200 reduced from 400 reduced by 70% 7.6 0.9 17 Chains for cars. oil wells, etc. 90 reduced from 240 reduced by 50% 18.3 -6.4 18 Electric transformers 181 reduced reduced by 60% 24.5 12.3 /1 last few months. SOURCE: Mission interviews - 116 - Table 3.17: Exports, Imports, and Import Competition in Selected Firms Firm Exports No. Effect of Imports Reaction to Competition Before Now 1 little in garments 1-modernization equipment 2-more use imported inputs 3-increase quality Yes No 4-Provide credit to clients 2 little because 1-modernization of equipment specialized market 2-more use imported inputs n.a. No 3 strong because 1-reduce administrative personnel up to 25% imports much cheaper 2-rationalization of production of sales No 3-lower prices 4 little because of 1-more use imported inputs quality and fashion 2-increase quality n.a. No 5 little because of 1-modernization some equipment quality and fashion 2-reduce price Yes No 6 little because of 1-modernization of equipment up to 18% No quality and fashion of sales 7 none 1-look for markets in other regions No No 8 none No No 9 none 1-modernize equipment No No 2-lower prices 10 some in bordering 1-increase production capacity No No areas 2-lower prices 11 little 1-standardize products No No 2-rationalize production 12 little on paints, 1-lower prices No No some on inks 2-increased voluwie 13 little 1-lower prices No No 2-sell equity to foreign firms 3-plan introduction new products 14 little, some in 1-lower prices because increased very No bordering areas local competition little 15 indirect through 1-close down of main client (govern- No No equipment with motors ment) left the firm in crisis 16 indirect through 1-reorient production towards car No No effect on clients industry because of crisis in client industries 17 strong imports sub- 1-reorient production towards No No stantially cheaper car industry 2-provide services 3-become importers 18 strong in one type 1-reduce prices up to 45% of No of transformers production SOURCE: Mission interviews. - 117 - Table 3.18: Sources and Costs of Credit in Selected Firms, 1978-1980 Financial Costs/Sales Firm No. Source of Credit 1979 1980 1 all in US$ 2 mostly in a$ 17.5% 37.3% 3 mostly in a$ 28.6% 4 60% in US$ 5. 11.8% 12.7% 6 mostly self financed 1.5% 1/ 7 all in a$ 13.5% 16.3% 8 in a$ from provincial banks .. 10.0% (2 1/2 years) 9 mostly in US$ 4-5 years, 4.5% 6.1% 8 1/2 % 10 20% in US$ 8.5% 13.9% 11 mostly sefl financed and a$ 16% 12% 12 mostly in a$ for working 3.1% 1/ 10.4% 2/ capital. Some in US$ from supliers (small debt) 13 60% in US$ .. 15% 14 mostly in US$ 7.5% 11.5% 15 mostly in a$ some in sup- 14.4% 8.2% pliers' credits 16 special credit from provin- 11.0% 3.1% cial bank 0.85-1% monthly 17 part in US$ because of 15.5% 17.6% imports 18 50% in US$ 1.0% 1/ 14.0% 2/ . not available 1/ 1978 and 1979 2/ 1979 and 1980 SOURCE: Derived from mission interviews. Table 3.19: Commercial Bankruptcy Liabilities , 1970-1980 (I millions pesos) ITEM 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 TOTAL 923.6 544.8 740.1 329.5 697.6 245.2 158.3 33,411 65,016 778,580 2,091,231 Commercial 911.6 535.5 730.1 322.1 692.4 235.2 146.7 33,091 63,149 777,307 2,044,576 Insolvency proceedings 834.8 475.6 658.1 274.3 642.7 186.3 46.4 29,084 36,806 393,645 1,833,855 Bankruptcies 76.8 59.9 72.0 47.8 49.6 48.8 100.1 4,007 26,343 383,662 160,721 Individual bankruptcy proceedings 12.0 9.3 10.0 7.4 5.2 10.0 11.6 320 1,867 1,273 46,655 Activities Agricultural 10.0 4.8 3.7 3.1 8.5 3.8 12.1 96 1,440 3,583 51,433 Trade 301.2 209.4 261.6 71.6 45.9 11.9 89.4 9,778 18,355 113,504 250,089 1 Industry 465.0 247.1 446.5 194.3 500.9 220.2 29.0 22,847 42,276 358,199 1,735,178 Individual 8.7 3.5 6.8 4.6 3.3 4.5 0.4 47 580 288 37,716 00 Services 126.8 67.6 12.5 48.0 139.0 4.7 26.9 643 2,309 299,593 13,199 1 Transportation 11.9 12.7 9.0 7.7 48.3 - 0.5 - 57 3,413 3,616 TOTAL 923.6 544.8 740.1 329.5 697.6 245.2 158.3 33,411 65,016 778,580 2,091,231 SOURCE: Veritas review Table 4.1: Monetary Base and Money Supply, 1977-1980 (in billion $a) 1980 1977 1978 1979 June December I. MONETARY BASE 3,246 7,034 13,310 16,258 21,896 Sources 1. External Sector (net) 1,592 3,607 8,655 5,129 1,437 (% participation) (49) (51) (65) (32) (7) 2. Domestic Sector 1,634 3,427 4,655 11,129 20,459 a) Public Sector (net) 1,083 1,676 1,620 2,309 10,633 (% participation) (33) (24) (12) (14) (49) b) Financial Institutions 606 419 786 7,712 11,135 (% participation) (19) (6) (6) (47) (51) c) Account of Monetary Regulation 242 1,660 2,926 2,240 1,312 d) Other Accounts -277 -328 -677 -1,132 -2,621 Uses 3. Currency 1,450 3,781 9,258 12,528 18,104 4. Commercial Bank Deposits at Central Bank 1,796 3,253 4,052 3,730 3,792 II. SECONDARY EXPANSION OF MONEY 2,990 10,801 38,187 53,985 76,425 Reserve Requirements (in %) 44 29 16.5 12 10 Voluntary Reserves of Banks (in %) 1.5 .7 .8 .9 1.1 Money Multiplier 1.92 2.54 3.87 4,321 4.49 III. MONEY SUPPLY (M2) 6,236 17,835 51,497 70,243 98,321 Annual Increase (in %) 186 189 135 91 Currency in Hands of Public 865 2,668 6,367 9,033 13,722 (% of Money Supply (13.9) (15.0) (12.4) (12.9) (14.0) Demand and Saving Deposits 5,371 15,167 45,130 61,210 84,599 (% of Money Supply) (86.1) (85.0) (87.6) (87.1) (86.0) SOURCE: BCRA - 120 - Table 4.2: Liquidity Coefficients M /GDP a/ M 2/GDP b/ M /GDP c/ 1970 .15 .26 .26 1971 .13 .22 .22 1972 .10 .17 .18 1973 .10 .18 .21 1974 I .15 .26 .29 II .14 .25 .27 III .14 .26 .28 IV .14 .24 .27 1975 I .14 .24 .27 II .11 .18 .20 III .08 .12 .13 IV .09 .12 .13 1976 I .08 .10 .11 II .06 .07 .08 III .07 .09 .11 IV .07 .10 .12 1977 I 07 .12 .13 II .07 .12 .14 III .06 .14 .15 IV .05 .14 .14 1978 I .07 .18 .18 II .06 .17 .17 III .06 .18 .18 IV .06 .18 .18 1979 I .07 .18 .18 II .06 .17 .18 III .06 .18 .18 IV .06 .21 .21 1980 I .07 .25 .26 II .07 .24 .26 III .08 .27 .30 IV a! M Currency plus demand deposits. b/ 2 MI plus savings deposits. c 3 = M plus discount bills. SOURCE: Central Bank Table 4.3: Distribution of Deposits and Liabilities in Argentine Banking System, 1978-1980 (in billions of $a) November 1978 September 1980 Amount % Amount % 1. Demand deposits 3,311.3 25.1 11,449.1 17.6 2. Common savings deposits 728.9 6.0 2,910.2 4.3 3. Special savings deposits 283.4 2.0 1,994.6 3.1 4. Fixed term adjustable deposits 7.9 0.1 2.0 - 5. Fixed term nontransferable deposits 2,871.7 21.8 18,025.0 27.8 a. From 7 to 14 days 542.5 5.0 3,641.9 5.6 b. From 15 to 22 days 209.9 2.0 1,815.2 3.0 c. From 23 to 29 days 98.5 8.0 760.6 1.0 d. 30 day deposits 1,127.6 9.0 5,415.5 8.3 e. From 31 to 60 days 632.5 0.5 6,267.8 10.0 f. From 61 to 90 days 142.6 1.0 728.4 1.0 g. From 91 to 180 days 53.1 0.4 255.5 0.4 h. More than 180 days 15.0 0.1 40.1 0.06 6. Fixed term transferable deposits 4,707.8 35.8 27,567.6 42.5 a. Less than 30 days 2,011.1 IT 10,114.8 -T3. b. From 31 to 60 days 2,088.2 16.0 13,512.5 21.0 c. From 61 to 90 days 340.1 3.0 2,129.7 3.0 d. From 91 to 180 days 220.5 2.0 1,340.7 2.0 e. More than 180 days 47.9 0.4 470.0 0.7 7. Other deposits 732.1 5.6 2,508.9 3.9 8. Other liabilities 73.2 0.6 155.1 0.2 9. Fixed term adjustable and nontransferable deposit 453.1 3.4 308.5 0.5 TOTAL 13,169,0 100.0 64,922.0 100.0 SOURCE: BCRA - 122 - Table 4.4: Average Monthly Interest Rates and Commercial Banks' Margins, 1974-1980 Nominal Interest Rate on 30-day Loans JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1974 1.2 1.2 1.2 1.2 1.5 1.5 1.5 1.5 1.7 1.7 1.7 1.7 1975 1.7 1.7 1.7 1.7 1.7 2.4 2.6 2.6 2.6 2.6 2.6 3.3 1976 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.1 1977 4.5 4.5 4.5 4.5 4.5 7.4 7.2 8.2 9.2 12.2 13.7 13.6 1978 13.4 11.1 9.3 8.3 8.2 8.3 8.0 7.8 7.4 7.4 7.6 7.9 1979 7.6 7.1 7.0 7.1 7.1 7.3 7.6 7.9 8.0 8.0 7.0 6.8 1980 6.6 6.0 5.6 5.2 5.4 6.4 7.0 6.0 5.5 5.2 5.4 6.3 1981 6.5 9.3 Nominal Interest Rate on 30-day Deposits JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1977 6.6 6.4 6.0 6.1 6.1 7.3 8.0 9.4 10.3 10.5 1978 10.3 8.3 7.1 6.7 6.9 7.2 6.9 6.8 6.2 6.5 6.7 7.0 1979 6.8 6.4 6.4 6.4 6.5 6.7 7.0 7.3 7.4 7.2 6.2 6.0 1980 5.8 5.2 4.8 4.5 4.5 5.4 6.0 5.0 4.3 4.3 4.5 5.4 1981 5.6 7.8 Commercial Banks' Margins JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1977 1.3 1.1 0.9 1.2 2.8 3.4 3.1 1978 3.1 3.8 2.1 1.6 1.3 1.1 1.1 1.0 1.2 0.9 0.9 0.9 1979 0.8 0.7 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.8 0.8 0.8 1980 0.8 0.8 0.8 0.7 0.9 1.0 1.0 1.0 1.2 1.2 0.9 0.9 1981 0.9 1.9 SOURCE: Central Bank - 123 - Table 4.5: Banking Credit (Outstanding at Year End) (in billions of $a) Private Public Year Total Sector % Sector % 1974 189 114 60.3 75 39.7 1975 529 288 54.4 241 45.6 1976 1,893 1,211 64.0 682 36.0 1977 6,285 4,334 69.0 1,951 31.0 1978 16,595 12,180 73.4 4,415 26.6 1979 51,001 40,023 78.5 10,978 21.5 1980 112,074 84,750 75.6 29,324 24.4 SOURCE: Central Bank - 124 - Table 4.6: Sources of Investment Financing, 1967-1980 a! Private Investment and Its Financing 1967/69 1970/76 1973/74 1975/76 1977/80 Gross Private Investment in 1970 ($a billion) 10.15 13.06 13.20 10.8 12.63 A. Total Financing (%) 100.0 100.0 100.0 100.0 100.0 1. External Sources of Financing b/ 33.7 9.8 15.4 -46.1 43.8 1. Domestic Credit a) With controlled interest 22.9 -9.7 20.2 -61.8 -6.8 b) With free interest - 4.7 3.9 10.6 44.5 2. Foreign Credit a) With exchange insurance 1.1 3.4 -4.8 4.0 -2.6 b) Without exchange insurance 3.7 7.6 -5.2 0.0 5.9 3. Equity Capital Stock Market 0.7 0.8 0.4 0.3 0.6 Direct foreign investment 5.3 3.0 0.9 0.8 2.1 II. Internal Sources of Financing 66.3 90.2 84.6 146.1 56.2 1. Results from operating in financing markets a) Domestic market -4.7 24.8 10.0 90.2 -13.2 b) Foreign market -4.1 -0.9 8.4 0.4 9.2 2. Depreciation and Retained Earnings 75.1 66.3 66.2 55.5 60.0 B. Structure of Net Borrowing c/ III. (as % of Total Financing) 18.9 29.9 32.5 43.4 37.4 1. Domestic Market a) With controlled interest 18.2 14.3 29.9 16.2 -6.9 b) With free interest - 5.6 4.2 22.9 31.7 2. External Markets a) With exchange insurance 1.0 5.2 -4.1 16.7 -1.6 b) Without exchange insurance -0.3 4.8 2.5 -12.4 14.2 a/ Loans and interest payments are deflated by wholesale prices. As a consequence, credit financing becomes negative in years of high negative interest rates (e.g. 1975/76). The subsidy element is captured in II, 1: results from operating in financial markets. b/ Financial sources external to the firms. c/ Small differences between IIi and 1.1, 1.2, and II. 1 are due to rounding. SOURCE: D.T. Cavallo and A.H. Petrei, "Financing Private Business in an Inflationary Context. The Experience of Argentina 1967-1980". Paper presnted at Conference on Financial Policies and the World Capital Market. The Problem of Latin American Countries. Mexico City, March 26-27, 1981 IBRE)-12432RI … -：一－－一戸． - -－γ：-- ヒ＿_____(_－……－--－二－－、－---－二－－」